Securing your children/grandchildren's future (without ruining your own!)
Securing your children’s or grandchildren’s future (without ruining your own!)
The ‘Bank of Mum and Dad’ may sound like a joke, but these days many parents and grandparents find their children or grandchildren turn to them for financial help well into adulthood. Whether you want to provide a private education, support them through university so that they leave debt-free or help with a deposit towards buying a home, it’s always easier to achieve if you plan ahead.
Funding for education
Making sure children benefit from the best possible education can be a very expensive business. The cost of private schooling has more than trebled since 1990 and continues to rise above inflation; the average day school fee is now £13,194 a year per child. Add to this university tuition fees of up to £9,000 a year plus living costs and you are looking at considerable sums. So the sooner you start thinking about how you’ll meet these costs the better.
What you can do
· Set your goals. Work out how much you will need. Don’t forget extras such as the costs of nurturing children’s talent whether they are budding pianists or potential Olympic swimmers.
· Think about when you will need the money, how much you can set aside in advance and how much you expect to meet from income at the time.
· Consider how much you can afford to save and whether you want to make regular payments or save ad hoc lump sums.
· Use your tax allowances. As well your individual ISA allowance of £15,240 for the 2016/17 tax year, you don’t pay tax on the first £5,000 of dividend income and the new personal savings allowance means some interest earned outside of ISAs is tax-free for most people.
· Decide how much you want your children to contribute. Children also have a tax-free saving allowance of £4,080 in a junior ISA for the 2016/17 tax year, but once they reach age 18 they have control over how they spend the money.
· If you can’t afford to pay for everything, prioritise. For example, you may find it’s more cost-effective in the long run for children to maximise their student loans while you help them buy their first home.
Once you have set your targets you will want to make your money work as hard as possible. There are many savings and investment products to choose from with different levels of investment risk. The best approach for your family will depend on how early you start planning and your other financial priorities, so it is important to take advice.
Contact your Origen consultant to find out more about your options and for help developing a plan to meet your financial objectives.
Help with setting up home
Once they have finished their education, children will probably be keen to set up their own home. But with both property prices and rental costs increasing fast, saving for a deposit can take many years. While there are a number of Government initiatives to help first-time buyers on to the property ladder, you may also wish to support them in their home-buying venture.
How you can help
· Give them the money for the deposit – this will not have any Inheritance Tax implications unless you die within seven years of the gift. (See Case study 1)
· Lend some or all of the purchase price – you will need to agree how and when this will be repaid.
· Act as a guarantor on the mortgage. This can allow your children to borrow more but means that you are jointly liable for the mortgage.
· For longer term plans, you can start saving to build up a deposit. There are some Government supported ways to make your savings go further when they are used for a first time property purchase. (See Case study 2)
Case study 1: Gifting money for a deposit
Natasha is 30 and wants to buy her first home. The average one bedroom flat in her area costs £250,000 but she can only afford to borrow £150,000.
· Her parents agree to gift the extra £100,000, which she can use as a deposit.
· This deposit may enable her to have more choice and get better mortgage rates and therefore reduce her mortgage repayments.
· This gift of £100,000 reduces the value of their estate in the event of the parents’ death and could reduce their Inheritance Tax liability.
· However, this sum will only be free of Inheritance Tax if they survive for 7 years. Otherwise the gift will be fully, or in part, liable to Inheritance Tax as a Potentially Exempt Transfer (PET).
Providing a gift to grandchildren or children when they need it, rather than passing on funds on death, can reduce Inheritance Tax and also provide real help for your loved ones.
Case study 2: Building up a deposit for a first time property purchase
Justin is 16 and is in secondary education. He is hoping to go to university but he and his parents are keen to start saving towards a deposit for his first home when the need arises.
· His grandparents would like to help and could choose an ISA investment for Justin.
· They could consider the Help to Buy ISA – which allows savings of up to £200 per month and/ or £1,200 lump sum investment and receive a 25% bonus from the Government when the funds are used for a deposit for a first time property purchase. A new Lifetime ISA is due to be launched in April 2017, available to aged 18-40, which will allow investment of up to £4,000 each year and offers a 25% Government bonus and the funds can be withdrawn without a penalty for a first home purchase.
· If you require more flexibility over how the funds may be used or wish to invest more, consider an ISA investment which has an annual limit of £15,240 after age 16 or £4,080 for a Junior ISA for the 2016/17 tax year. These investments grow free of tax but do not attract a Government bonus.
· Based on an initial investment of £1,200 and £200 per month, assuming 5% growth each year, a deposit can be built up to give Justin a helping hand:
After 5 years
After 10 years
Value of investment(approx)
Government Bonus (Help to Buy ISA & Lifetime ISA only)
£3,000 (Maximum bonus)
£3,000 (Maximum bonus)
Regular investing over a few years can build up a deposit for a first time property purchase – the sooner you start, the more achievable it is to provide a valuable deposit.
Contact your Origen consultant to discuss the different ways you can help your children onto the property ladder, whether it be in the short term or longer term.
Consider your future too
It may sound obvious, but you need to consider how any financial help you give, may affect your own future. Research by insurers Aviva finds that the average contribution made by parents towards a child’s home is £25,090 and in most cases this comes from savings and investments.
Almost a third of homeowners aged over 45 plan to give money to help a child buy their first home or have already done so, but nearly 40% say that they would like to help their children buy a property but can’t afford to. More than half of those surveyed do not feel comfortable giving this help without knowing how much money they will need themselves to live on in later life.
When thinking about securing the future of children in your family, why not review your own finances? Are your pension savings on track? Are you happy with how your investments are performing? Are you making the most of the available tax breaks?
Your Origen consultant can help you answer these questions and more, to help you support the children in your family now and yourself in the future.
This article is for information only, based on our understanding of legislation and HM Revenue & Customs practice as at September 2016 and is not to be taken as Financial Advice. CA1202 Exp 04/04/18
[ Date Posted: 29/09/2016 11:50:16 ]