Saving now for a grandchild or child can provide help in the future when they need it most.
Proud parents of a newborn or toddler are unlikely to have the matter of the accumulative cost of the upbringing of a child into early adulthood – and the financial support that may be needed beyond – at the forefront of their mind.
Instead, they are likely to focus on more immediate expenses through nursery and school – with usually precious little spare time or income to consider anything beyond the near term. The estimated cost of bringing up a child to the age of 21 is £229,251.1
But the transition to independent adulthood can be financially daunting. And recent research reveals just how cash-strapped today’s young adults have become in the years of recession and austerity. Earnings of 22- to 29-year-olds fell by 11% in real terms between 2009 and 2011.
It’s no surprise then that nearly four in five young adults aged 18 to 30 received financial assistance from their parents and grandparents – a total of £35.2 billion’s worth – in 2014.2 Britain’s parents handed over to their adult children almost £30 billion of this total in direct financial support last year, with the rest shouldered by grandparents.
There is the matter of house deposits, which parents and grandparents contributed respectively £8.3 billion and £1.9 billion towards last year.3 Overall, more than half of 25- to 29-year-olds could not afford to buy a house without family help. The average deposit of a first-time buyer was £29,218 in 2014.4
Parents are also supporting young adults’ everyday expenses with one-off boosts (£5.1 billion) or in buying cars (£2.6 billion). Grandparents gave £1.3 billion in cash and £846 million towards rents too. Then there is the expense of university (the average undergraduate debt is £44,000)5; weddings (with an average cost of £20,983 in 2014)6; and, perhaps, a new generation of children for a family to cherish – and fund (average cost to age 21, see above).
These are hefty and serious considerations for any family – particularly when they are a decade or two away while, in the present, there are the more immediate and pressing matters. But the next few months in the run-up to the tax year-end is an opportune time to take a long view on financial commitments – however far away they seem now.
For those who are able to act now to lay down some financial support for a child when they enter early adulthood, a good place to start is the range of tax exemptions that could be used and not lost before the new tax year starts on 6 April.
One tax-efficient way to save for a child’s future – particularly for older relatives – is to make gifts to reduce Inheritance Tax liability. “The exemptions from tax offered on gifts by HMRC can appear minor in isolation, but their consistent use as part of an Inheritance Tax plan can produce significant savings and benefits,” says Tony Müdd, tax and trust specialist at St. James’s Place.
Each individual has an annual gift exemption of £3,000, and can also take advantage of the previous tax year’s exemption until 5 April if it was unused; that for married couples and civil partners would jointly amount to £12,000 in gifts to divide up as they wish.
Advantage can also be taken of the ‘normal expenditure from income’ exemption, which offers flexibility and, with no limit, is potentially the most generous exemption. A number of broad conditions do apply, which include the need for a regular pattern of gifts to be established and that gifts come from surplus income. Of course, gifts can come in all sizes, and individuals can give up to £250 to unlimited numbers of people in any tax year.
An investment in a tax-efficient Junior ISA, whether through a lump sum or regular savings, is an ideal way to give children or grandchildren a head start and build up capital for their future. The maximum that can be invested for each child in this tax year is £4,000; the allowance will rise to £4,080 from 6 April. Aside from the tax benefits – no further tax to pay on income or capital gains – money invested in a Junior ISA is locked in until the child’s 18th birthday, providing a disciplined savings vehicle which will then be rolled over into an adult ISA.
Alternatively, there is the option of contributing early on towards a pension. Children can have a pension fund as soon as they are born – and setting one up can bring significant tax advantages. More than 10,000 children already have pension plans in place, according to HM Revenue & Customs. The gift could be boosted by 20% through the tax relief available on contributions.
An adult with this foresight would maximise the benefits of compound growth – and even a few years of contributions can build a substantial pot. A £3,600 annual contribution for the first five years of a child’s life would create a pot worth £121,000 by the time he/she turned 60, assuming 3% net growth per year.
Of course, money isn’t everything, but when a child reaches adulthood it can make the difference between whether or not they can afford to seize their opportunities and follow their dreams. It’s one way to give them the best start in life and help them to get established. And the sooner one starts the better.
The favourable tax treatment given to a Junior ISA may not be maintained in the future as it is subject to changes in legislation.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief is generally dependant on individual circumstances.
1 Centre for Economics and Business Research, February 2015
2 Lloyds Bank Family Savings report, January 2015
4 Halifax review, January 2015
5 Institute for Fiscal Studies, 9 December 2014
6 You & Your Wedding survey, 15 January 2015