This content is for information purposes only and intends to inspire your thinking. It should not be taken as financial advice. To receive tailored, regulated financial advice please consult us here in Oxford.
It is very natural for parents to want to give their children a better chance in life. When it comes to building wealth for your children, we at WMM tend to come at this from two angles as financial planners:
- Building up wealth with your child gradually, especially through saving and investing.
- Passing on wealth to your children one day as an inheritance.
Every family is different with regards to its composition, financial situation and goals. So it’s always best to consider seeking professional financial advice to identify the best options for your particular needs. In this article, we’ll be sharing some ideas on the above two areas which you can discuss with them.
We hope you find these thoughts helpful, and if you would like to discuss your own financial plan with us, please get in touch to arrange a free, no-commitment consultation with a member of our team here at WMM.
Building up Child Wealth
Perhaps you want to give your child a set of financial savings for University one day. Or, maybe you want to start building up their pension, or help them prepare a strong house deposit. Whatever your goals, you are likely going to want to consider some options for efficient saving and investing to help achieve them.
Savings Accounts
One of the best ways to build wealth for your child is to help instil a sense of responsibility for saving for the future. When they are young, this might be as simple as encouraging them to keep a piggy bank which they can build up with pocket money; even if this is as small as 10p. Eventually, you can introduce them to a children’s savings account at a bank or building society, which they can take responsibility for after the age of 7.
ISA’s -including Junior ISA’s (JISA)
An individual savings account (ISA) can be a good step to consider with your child, especially because it helps to educate them about “tax efficient saving”. Remember, in 2019-20 all interest earned within an ISA is tax-free. They can only access the money in an ISA once they reach age 18, but the money still belongs to them. A Stocks & Shares JISA can be a particularly useful account type to consider, since it helps children to learn about the “ups and downs” of investing in the short term, whilst achieving growth in the long term. However, these are not allowed if your child has a child trust fund (CTF).
Child Pensions
In 2019-20 parents can open a pension for their child (such as a SIPP; or Self-invested Personal Pension), and contribute up to £2,880 per year. So, if you opened one shortly after your child’s birth and put in the maximum amount over 18 years, then they would likely have £51,840 in their pension before investment growth is even taken into account. This could give your child a much stronger financial foundation in retirement, but bear in mind that under current pension rules the money will be inaccessible until they reach the age of 55.
Passing on Wealth to Children
The above are just a handful of ways you might help your child financially, whilst you are around and whilst they are growing up. Once they are older and (hopefully) financially independent, how can you continue to support them? Also, what can you do to ensure that as much of your wealth as possible passes on to them when you are no longer around?
Here, it helps to have a strong grasp, ahead of time, of the foundational elements of inheritance tax. After all, the more you know about this early on, the more you can do to better-prepare your estate to pass on tax-efficiently to your children. Here are just some of the important areas you might want to discuss with one of our financial planners:
Thresholds
In 2019-20 you are entitled to pass on up to £325,000 of your “estate” to beneficiaries when you die, without facing inheritance tax (IHT). Your estate includes things like:
- Property (including your family home).
- Vehicles
- Jewellery and other possessions
- Investments and savings
- Businesses you own
However, your estate does exclude certain things which are important to be aware of for IHT purposes. For instance, certain investments are exempt such as Enterprise Investment Scheme (EIS) shares which you have held for at least 2 years. Pensions are also excluded.
You can raise your own IHT threshold, however, if you pass on your family home to direct descendants such as children or grandchildren. This allows you to claim an Additional Nil Rate Band of £150,000 in 2019-20.
Allowances
The above would theoretically mean that a single person could potentially pass on at least £475,000 to one or more children without facing IHT (i.e. £325,000 + £150,000).
If you are married or in a civil partnership, however, then each of you are entitled to your own Nil Rate Band and Additional Nil Rate Band. So, in some cases a married/civil partnered couple could pass on up to £950,000 to their children in 2019-20, free of IHT.
Other Options
These are just two important areas to mention when it comes to passing on family wealth to children as an inheritance. There are many other important strategies available to you which you could discuss with a financial planner, such as leveraging your pension or taking advantage of Annual Exemptions for gifts.
The key point here is that growing wealth for your children involves thinking strategically, both over the short and long term. There is much you can do right now, practically, to help lay a foundation of wealth for your child whilst helping to teach them about the importance of saving, investing and planning for the long haul. You can also prepare you own estate appropriately with a financial adviser to help ensure your wealth goes into the right hands in the future.
If you would like to discuss your own financial plan or estate with a professional financial adviser here in Oxford, then we invite you to get in touch to arrange a no-commitment consultation with our team at WMM, at our expense. You can reach us on 01869 331469.
