When making future financial plans for your children, it is essential to consider inflation if you want to ensure that your money stretches far enough. Inflation affects everything from everyday items to how long your pension savings last and with inflation currently soaring, it’s really important to inflation-proof your children’s savings.
Clearly, the support you give them will depend on your means but here are some practical ways that can help you to secure your children’s financial future.
Junior ISA
Opening a savings account for your child can be a fantastic way to boost their finances. A junior ISA (JISA) is a tax-free savings and investment account for children under the age of 18 and can only be opened by parents or legal guardians. If your child already holds a Child Trust Fund (CTF), they are not eligible to open a JISA unless this is transferred to a JISA and then closed. Either you or other family members and friends can contribute up to £9,000 combined in the current tax year (2022/23) without needing to pay income tax on any interest earned or capital gains tax. This is the same for the CTF[1]. A Junior ISA can be an efficient way of saving because tax isn’t paid on the returns. This means when they turn 18, and the plan converts to a standard ISA, the funds will continue with the same tax free treatment and won’t be liable for income tax and capital gains tax deductions.
Setting up a trust
There are several different types of trust that you could use to save for your child, each with its own benefits and downsides. A trust can be a useful and alternative way of investing for children both during their childhood and throughout their lives. Setting up and looking after a trust does not need to be difficult and it will give you greater control over how and when you and your child can access the money. Most trusts can be set up during lifetime or on death. The types of trust involving inheritance are usually bare trusts, discretionary trusts, 18-25 trusts, vulnerable beneficiaries’ trusts, and life interest trusts[2] For larger investments for children, the most effective solution could be a combination of the different types of trusts.
Trusts can be set up for children under the age of 18, as well as for older children.
Gifting money to Children
Every UK citizen has an annual tax-free gift allowance of £3,000 which enables you to ‘gift’ money to your children without worrying about inheritance tax. However, this is from your total personal allowance, which means that you cannot give away £3,000 to each child you have, and you may need to split this amount between your children to effectively use your allowance. This is a per person allowance so both parents may gift £3,000 each per year. If you don’t use your total gift allowance, you can carry it over to the following year, as long as the later year’s allowance is also fully used. Regular gifts made out of surplus income can also be immediately outside the estate and they have no specific monetary limit[3].
