Saving for children

Sometimes the questions are complicated and the answers simple… Dr. Seuss

 

“what do you want to be when you grow up”?

That’s where it starts, but really, should it be Who, not, What?

 

After the first few years of planning soft play parties and buying £10 presents in every sale, because there is always a party due, we are now spending weekends meeting Youtube idols and Musically stars.

Expressing herself with a Jake hat and meeting ex-tesco worker and youtube multi-millionaire Dan TDM.  Seriously, though… plays minecraft for a living

 

Putting birthday money away was one thing, but now, looming over the horizon are education costs, moving out, getting married (too early to be planning that?)

Well, the average age of first time buyers is now around 38

So, when do I get to choose the wallpaper in every room again, have that little home studio, downsize, move to the coast.

Who do I want to be when I grow up?

 

What is availble for children’s savings, short or long-term

The grand-parents always say they want to help or give something to them.  But where and what?
What are the risks and what if I pick the wrong thing, because, let’s be honest, I am going to suffer the shortfalls too
Interest rates on savings accounts seem low, so what other options do parents have?

 

 

Places to start

Junior ISA’s

Individual savings accounts (ISAs) are now available to children, and are known as Junior ISAs. These are long-term, tax-free savings accounts. Junior ISAs are available for children up to the age of 18, and the money cannot be withdrawn until the child’s 18th birthday. Anyone can contribute to the account, although the total amount that can be invested during a single tax year is capped at £4,128 (2017/18)

Child Savings Bonds

Offered by friendly societies and allow parents, grandparents, other relatives and friends to all save up to £25 a month on behalf of each child with the benefits then being earned free of further tax. The bond must have a minimum term of 10 years, up to a maximum of 25 years. The contributions must be maintained to earn the tax benefits. However, they do offer a valuable alternative, particularly if you are not the child’s actual parent.

Pensions

These are a niche choice for investing for children, but can provide a solution in certain circumstances. Investments into a pension attract tax relief on the way in, but tax is payable on any income received.

You can contribute up to £3,600 gross every year in a pension on behalf of your child. That will cost a basic-rate taxpayer just £2,880 as the government adds tax relief, but the child will not be able to access the money until they are 55.

Life Company Regular Savings Plans

These tend to be used by relatively sophisticated investors, particularly expats and international executives. Investors can use them to build up a tax-free lump sum and then assign segments of it to their children. These segments are usually paid out tax-free as long as they fall within a child’s tax-free allowance but, in the meantime, the policyholder retains control of the investment policy.

 Designated Investment Accounts

These are a good alternative to a Junior ISA, if you wish to retain control of the investment once the child reaches 18.  These are simply held in the Parents name(s) and are Designated for the child, and until the parents (or grandparents) decide, the investment is held without the knowledge of the child.

Child Trust Funds (CTF)

Although CTFs were stopped in 2010, millions of parents still have active CTF accounts for their children. Parents, family and friends can add a total of up to £3,600 to the account each year. There is no tax to pay on any income or any gains from the fund.   The account remains in the child’s name and they will ultimately have control over how it is spent.  Some providers will allow you to switch them into a Junior ISA now

Trusts (How to keep control)

Legislation over the past few years has eroded many of the tax-planning advantages of trusts. In general, these are now used to control access to the funds rather than for tax planning.

Income and capital gains are treated as those of the children, which means that they can use all their allowances each year. It also gets round the problem that children cannot hold shares in their own name.

 

 

 

Teaching children the value of money

We need to talk about money early

It’s amazing the thoughts you have when riding through the lovely local parks

I can’t remember exactly when it started, but I have more and more clients coming to me in their retirement years, seeking to release money from their home to fund retirement, repay mortgages and debts, and in a number of cases it’s for their children and grandchildren

Mortgage providers will now lend up to age 75 and beyond!

There are many reasons people have credit card debt and/or a mortgage in their latter years, tough times, started late, Interest Only mortgage with no repayment vehicle……

Disposable Income

  • If asked, most of us would say it’s the bit left over after bills, food, rent/mortgage, debts
  • How many would include regular savings in necessary expenditure?
  • How many include car, holidays, Christmas, birthdays, socialising in necessary expenditure?

Cost of debt

  • Interest rates are the headline, who can explain what an APR is?
  • To be honest, this is just the long-term physical charge you pay for access to the money you borrow
  • The real lesson that doesn’t appear to be taught, is that if you are borrowing because you cannot afford your lifestyle, the following month, you will have even less income, due to your new monthly debt repayment.
  • This is the start of the cycle.  Seek zero interest cards, pay nothing for 6-months, repeat

Interest might be zero, the debt remains the same as it did 6-months ago

 

The future

While some are fortunate enough to have willing parents and grandparents, the next generation is likely to find the cupboard bare.  Longer lives, longer retirements, much more hedonistic parents seeking thrills post-retirement, the funds are evaporating much quicker

 

 

 

 

 

 

 


“Nothing but books, learning and education, that’s why you’re no good at snooker, Rodney”

 


My 14-year old daughter has taught me a lot about the instant access, want it now, deliver it tomorrow generation.

I set tasks (brush teeth, clean room, communicate with parents) and if she completes them, monetary bonuses are awarded (by said parent)

If we rewind a bit, I have a pre-fund Visa card (aimed specifically at giving parents some oversight and control).  It is App based and the child has a debit card, on to which, I put her allowance on it

Both of us have an App, the parent side shows balances, spending, savings.  Tasks are confirmed by me and I can set the maximum she can spend online, in store and withdraw at an ATM, in a single transaction or in the course of a week.

More importantly, the funds are linked to my bank account, so a direct debit arrangement automatically funds the card at the limits I set.  She can also set savings goals and the App shows graphically how close she is to her target

 

What have we learned so far?

The main lesson for me, is that when she is saving for something, she won’t spend her own money – that’s a good thing, right?

Well, like all learning curves, we’re still on the climb!  Occassionally, I get something, “I can’t buy (it), as I am saving up, can you put more money on or buy (it) for me

Now in some respects, she’s getting the delayed gratification ideal, but not to the extent where she feels there is other money to be had

So, this leads to our next lesson………

Money doesn’t grow on trees

Young adults (and actual adults, in some cases) can easily believe that there is an infinite source of money, with the plastic in the pocket.  I have advised too many who only experienced the finite element, once the repayment burden overtook income

My daughter is great at telling me she needs that new thing, normally goes like this, “but I have wanted it for ages / always wanted one of those” – (insert since I saw it on Insta / TV / snapchat about 5 minutes ago)

According to Livingwage.org, the London living wage is £10.20 per hour

I think that a good lesson for children (and it has to be age appropriate to resonate), is to drive home the correlation between time given and money earned

For instance, next time you are asked for money, tell them to switch off the electronics for 1 hour and see how important that purchase is

Set expectations

Having visual goals is really important to make them consider an instant purchase or delayed gratification

It doesn’t even have to be a thing, could be spending money for holiday or plan a family trip and each person has to put in a specific amount to the communal pot

 

Jobs and chores for extra money drives home the relationship between work, effort and reward.  Teaching some respect for striving for something

Saving on a regular basis is a great way to instill a sense of discipline to one’s habits and as the fund grows, the attachment to it often makes it harder to spend.  Many clients evolve their habits so that they want to nurture their savings pot and start to hold it with something more than just physical value

Share the wealth

Generation mine, mine, mine has created many Instagram / Youtube channels where the Veneer is one of a lifestyle most can only dream of

I believe that the hardest lesson is giving money away, as it teaches you that you have the power to make someone’s life better and you are in a better position than others

Want to see a confused child?  Give them some money and tell them to give it to someone else or put it in a charity box

Sow the seeds

Parents have a great opportunity to teach children the value of saving for the future

We have helped many parents invest and save money for their children and we are now at the stage with some, that it is time to hand the money over!

To help with this process, we sit down with the child (adult really) and explain how their parents accumulated it, with consistent application, sacrifices of income, so that the relationship is more than just a lump of money, it is work of years

We then discuss the expectations of the recipient and help them decide where best to use it.  We find that most don’t skip off to the Honda showroom, but actually engage with it and do their own research on where they might wish to invest it and continue to build

Who is it really for?

Engaging my daughter has worked for me, I have looked the businesses she supports (Apple, Instagram, YouTube), talked to her about the new industries that she finds interesting (Robotics, AI, fashion etc)

I have then invested some of her nominated money in these areas, which makes it much more exciting and starts the process of correlating that these are businesses, beholden to shareholders and not some mystical App built by the users

Full circle

  • HMRC receipts from Inheritance Tax are at their highest level
  • I have extolled the virtues of ‘Family money’ for many years.
  • Individual family members do not share their accumulated savings, so the first time children know their parents wealth, is when they calculate the tax due on it
  • Why bother saving, why seek the best rates, when you intend to give 40% of it to Tax?
  • While parents are getting 1% on their savings, their children are paying interest on their mortgage of 3% and credit cards at 18%.  Worse still, they are paying rent, essentially, buying a property for their landlord

Time to think differently, time to teach children how to save

We need to halt generation debt, challenge generation rent and build generation financially aware;

  • Open a savings account, put a portion of birthday and Christmas money in it – start the process of saving from income
  • Match their contributions to teach benefits of pooling resources
  • Invest in a Junior ISA – if they are old enough, discuss where it is invested – engage them
  • Set tasks and chores for monetary reward
  • Help them set their own tasks and negotiate the reward
  • Visualise the return – show them statements – picture the final outcome
  • Make sure goals are short, medium and long-term – to maintain their interest