4 ways to build a nest egg for your child during the cost of living crisis

If you’ve tuned into the news the past few months, you’re likely to have heard the same phrase repeated: “cost of living crisis”.

As a parent you will not only be weighing up your own financial decisions but will also be thinking about how to best protect your child’s financial future, as high inflation continues to shrink disposable income and cause the real value of many long-term savings to diminish.

One of the core principles of financial planning is to give you the means to achieve your lifestyle goals. So, by working with a financial planner as a family, you can directly involve your children in key decisions that might affect their own long-term objectives.

Read on to discover four ways you can build a nest egg for your children during the cost of living crisis and help them realise their life goals.

1. Create a plan that aligns your key life events with theirs

A financial plan is a long-term strategy that takes in periods of highs and lows. The possibility of major life changes will be factored into your plan so you can stay on track to achieving your long-term lifestyle goals.

However, your child is also likely to face their own key life events as they venture out into adulthood such as pursuing higher education, getting married and trying to get onto the property ladder themselves.

As a family, you’ll want your plans to be intertwined so that your life goals don’t clash with one another.

You don’t want to be in a position where your child is undertaking a university degree and would benefit from your help with course or lifestyle costs, but you’ve decided to start up a new business at the same time and have most of your funds tied up in your new opportunity.

By creating a joint family plan, you will be able to continue helping your child towards developing a nest egg of their own and fulfilling their own life goals.

A good way to achieve this is by working closely with a trusted financial planner who fully understands your family’s individual aspirations and needs.

2. Start saving for your children early in life, so they can enter adulthood at an advantage

Start early, even if its small. Even small sums saved on behalf of your child can build towards a healthy fund for their future.

Junior ISAs (JISAs) provide a tax-efficient way to save for your child’s future. The JISA annual limit is £9,000 (as of the 2022/23 tax year) and no tax is payable on interest gained from the savings.

You have two choices when it comes to a JISA – a Cash JISA or a Stocks and Shares JISA. A Cash JISA works like a traditional savings account, but all interest is paid tax-free. A Stocks and Shares JISA allows you to invest in funds, shares, and bonds. Any profits made from these investments are free from Income and Capital Gains Tax.

Investments are a riskier approach than cash savings but could provide your child with larger profits.

It’s all about assessing the right level of risk for you and your children. Working with a financial planner can give you the reassurance needed to make the right decisions.

3. Don’t allow taxes to diminish your child’s nest egg

When money or assets are paid into an account set up for someone else’s benefit, in this case being your child, then these contributions may be treated as gifts by HMRC.

So, if you have a large estate, it’s worth thinking about how you can make gifts in a tax-efficient manner.

For example, every individual has an annual exemption, which allows you to make gifts of up to £3,000 in a tax year, with these gifts immediately falling outside of your estate for Inheritance Tax (IHT) purposes.

Additionally, any gifts you make to children will typically fall outside your estate if you live for more than seven years after making the gift.

This is called a “potentially exempt transfer” (PET) and sound planning can help you to provide financial support to your children or grandchildren, and mitigate potential IHT at the same time.

4. Provide for your children after you’re gone with a carefully tailored estate plan

Finally, it’s important to plan for your child’s financial security after you’re gone. This can take several forms such as having you or their grandparents wind down your lifelong accumulated wealth by gifting funds earlier on in life, as you read above.

Younger generations are due to inherit more than ever before and will likely face increasing IHT challenges. A report from the Resolution Foundation shows that inheritors can expect to receive £293 billion over the next 20 years, and it could reach as much as £5.5 trillion by 2047.

The average individual, born after 1980, can expect to inherit between £200,000 and £400,000. This increases the importance of a smart financial plan that considers IHT allowances and exemptions.

In addition, the report found that longer life expectancy means inheritance will be received later in life with the average age expected to be 61.

So, it may be beneficial to explore gifting over the course of your lifetime to your children to help them with milestones rather than leaving your wealth to be resolved after you’re gone.

Get in touch

Financial plans are designed to protect your and your family’s financial interests and keep you on a path towards your established savings and lifestyle goals.

By putting together a plan for your children you can make smart investment decisions on their behalf to give them a platform to build upon in adulthood.

For more information and to seek advice with planning for your family, contact us at helpme@aspirellp.co.uk or call 0117 9303510.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

All contents are based on our understanding of HMRC legislation, which is subject to change. This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

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