Inheritance Tax / Financial planning

What financial support should I offer my children or grandchildren?

For many families, there’s a strong sense in ensuring the next generation enjoys some form of financial support. As well as equipping young people with financial literacy skills, there are practical ways to help your own children or grandchildren build a good financial foundation. Ed Read Cutting, our Director in Belgium, takes a look at ways to carve out a strong financial future for young people, and speaks to some of our team about a few of the steps they’ve taken to help their own children or grandchildren along the way.

If you’re a parent or grandparent, you might be keen to offer some form of financial support to younger generations. Whilst what you decide to do will depend on your personal wealth and how much help you want to offer, it’s worth remembering that it’s never too early to start financial planning. Putting plans in place can provide a solid financial grounding which children can build on in later life.

Some of the financial steps which you might want to explore are:

Building good savings habits

For many families a savings account is the first step in a financial plan for children. Particular milestones, such as birthdays, provide an opportunity for family and friends to contribute and you can add lump sums and gifts along the way too. Sharing the progress of these savings with children, as they get older, offers a great opportunity to see how funds grow over time, and in due course they can start to make some choices about adding some of their pocket money, or earnings from chores or a part-time job.

There are alternative savings products too. Premium Bonds are an interesting option – something of a cross between a savings scheme and an investment opportunity where instead of interest, Bondholders are entered into monthly draws for tax-free prizes. As a result, they can provide a useful tool to introduce the concept of risk. Premium Bonds can be gifted to anyone under the age of 16, and each individual can hold up to £50,000. They are also backed by the government, so offer some security for any original investment made. Bonds can be held by those outside of the UK too, with winnings paid into an international bank account.

“We have a ‘stocks and shares’ savings jar that my daughter contributes earned pocket money and gifts to. I periodically top it up with small change to make a pretend investment return. We make a point of checking it every month to see how savings grow – if left alone!” Hugh Johnson, Global Head of Operations (UK)

Understanding tax-free, long-term investments

In the UK, any parent or guardian can set up a Junior ISA (JISA) – an investment vehicle free from tax. At 18 the JISA transfers to an ISA, and the money becomes the young persons to control. JISAs work in exactly the same way as ISAs and can be invested in cash or stocks and shares or a combination of the two. These savings options can be particularly effective, and contributing the current annual allowance of £9,000 would create a pot of £210,000 based on a 3% yield over 18 years. Of course, if this was achieved it would be sensible to have ensured that your child has good enough financial sense to manage such a significant amount.

“Having each child pick a fund with money added each birthday and Christmas, allowed my children to discuss the merits of their investment choices.  There was a sibling rivalry, but this was channelled in a healthy way and they learnt from each other’s ideas.  My middle son is now an investment analyst!”  Ed Read Cutting, Director (Belgium)

Setting up a pension

This might seem a rather strange suggestion, but it’s worth remembering that pensions can be set up at any age, although the funds themselves can’t be accessed until much later in life. As well as contributions, the government will add basic rate tax relief, boosting any pension pot. Tax incentives and long-term compound interest can play their part too, allowing pensions to become a valuable part of any financial portfolio. They can also give children a great head start when it comes to their own retirement savings.

“Children really are interested in their financial future and deserve to have knowledge about how and when to plan. My daughter would often hear me rehearsing for pension presentations and one day, when she was about 14, she asked if she needed to start to save her pocket money for her pension. And in the financial education workshops I’ve delivered to children at various schools I’m always amazed at the depth of their questions.” Amanda Newell, Financial Planner (Belgium)

Providing for them if the worst happens

If you have children, or young people in your life, then a Will is a necessity. This will ensure that your wishes, when it comes to their financial inheritance, can be properly detailed. It will also allow you to specify who you want to care for them if they are under 18 and set up Trusts if needed. Choosing Executors who you trust is important too – as they may be part of any decision making – financial or otherwise – which your children could need support with.

Estate planning is not just something for later years. The key is to explain the purpose of a Will to the younger generation, so they understand the impact of not having one. I helped my son get a Will arranged as soon as he bought his first property, simply because, other than cash, he had little in the way of assets. I’ll also encourage him to regularly review that Will, especially if he marries or has children.” Steve Wright, Estates Director (UK)

Sharing financial gifts

Lump sum financial gifts can be made to children and sharing wealth in this way, through your life, can be a powerful step in helping reduce Inheritance Tax (IHT) along the way. In the UK anyone can gift up to £3,000 each year free from any IHT charge and there are other allowances too – such as for weddings. Incremental steps to share wealth can be very useful if you want to pass large sums of money to your children without fear of them facing a significant bill when you die. So, you may want to make a regular payment to help build a house deposit, for as and when they want to get started on the property ladder.

Although they’re only available to those living in the UK, LISAs (Lifetime ISAs) can be very helpful in this situation. Open to anyone aged 18 to 40, these tax-free investments can be used to save up to £4,000 a year, with an additional 25% bonus added by the government. Money can then be withdrawn from a LISA to fund the purchase of a first home, or at age 60. When making any financial gift it’s worth bearing in mind the seven-year rule; any gift you make in the seven years before you die will be classed as part of your Estate, potentially falling into the IHT net. If this is a concern, then you might want to explore Trusts as part of your Estate plans too.

Paying school fees

Private education, or private tuition for those attending state school, can be a significant financial undertaking. The average day school fees for independent schools in the UK topped £15,655 a year in 2022 with boarding and overseas options considerably more. University fees can add a substantial amount for any young person studying beyond the age of 18 too. Paying for these fees can be a preferred choice for some grandparents, to help ease the financial pressure which a private or extended education can bring. Alternatively, if university does become their preferred route, you might want to help in other ways, perhaps covering their rental costs, or other bills instead. If made by grandparents, these payments do sit outside the Estate for UK IHT purposes.

Equipping children with financial literacy

Just as you’d expect young people to be equipped with a strong education, it’s also true that children and teenagers need to learn about how to manage any money they have – so they can deal with financial issues they’ll likely face in later life. Understanding why it’s important to save money, build investments, assess possible scams, appreciate the purpose of tax and manage any debt – from credit cards to mortgages – are crucial life skills. Talking to them about this and showing them how you manage your own financial responsibilities can be a worthwhile lesson. There are also a host of online resources – from banks and other financial providers – which can offer great tools for learning about money.

“We’ve concentrated on the basics with our children. Our advice has always been to have an account with a debit card for spending, whilst making sure there’s a savings account too to hold money back for Christmas and paying your own way. Budgeting is a key life skill.” Jeremy Woodley, Director (UK)

Sharing wealth through the generations is a particular focus for some families. Choosing what steps to take to pass on any funds efficiently, and with a view of empowering young people with strong financial skills, can be a delicate balance. To discuss your own plans to establish a strong financial future for your children or grandchildren please contact your nearest office.