Anyone with children will know the costs involved with raising a family. Those who are planning for a family in the future will also have a pretty good idea. Recent figures suggest that the costs of raising a child could be as much as £229,000…and it’s increasing.
There are ways to make this figure more financially manageable though by understanding tax and inflation implications as well as making clever investment choices.
The cost of having a family
According to a recent report by Liverpool Victoria, the average cost of raising one child from birth to 21 years old is over £229,000.
This includes everything from food, clothing, childcare, school trips, university education, holidays, hobbies, toys, pocket money, driving lessons, and birthday and Christmas presents. This does not include the cost of private education, which can add another £129,000 to £237,000, according to figures.
Clearly no two children are the same and some children will choose to go to university whilst others will not, others have to work themselves to pay for driving lessons, where others won’t.
The point is though, the figure is big, and it is increasing. There has been a massive 63% increase since 2003 and a 0.9% increase since last year.
Ways to reduce the financial burden
There is no getting away from the fact that having a family will cost you money. However, there are a few things to consider to help you save efficiently for future events such as university fees whilst minimising tax implications and protecting investments against inflation risk.
1) Savings Accounts
Many high street savings accounts can be opened for your child from their birth, which can be effective for a short term savings strategy. There are a few things to watch for on the tax side though.
- The new tax free personal savings allowance coming into effect from April 2016, enables tax-free interest income to be earned up to £1,000, for basic rate tax payers, £500 for higher rate tax payers. This means more savings can be made before tax is charged, and no R85 form is required.
- However, watch out parents! If you give your child money and interest is earned over £100 per parent per year, then the income is added to your own taxable income and tax is charged at the appropriate rate.
2) Junior ISA (JISA)
The JISA is a good way for a medium to long term savings plan. The account is set up in the name of the child and funds belong to them, however, they can not access the account until they pass 18 years of age.
You can contribute £4,080 per year (15/16) and, as long as you and your child are UK residents the income can grow within the account with zero tax implications.
(3) Child’s pension
Not everyone knows this, but parents can open a pension for their child and claim tax relief at the basic rate (20%) from the Government, even though the child isn’t paying tax.
You can invest £3,600 per year on behalf of your child (15/16). This is a long term strategy though as funds can not be accessed until retirement age, now aged 55.
(4) Trust funds
A trust fund can be used to look after money for your children until they are able to manage it themselves. It is complicated though and requires a solicitor and tax adviser.
(5) Minimising inheritance tax (IHT)
IHT can be costly for families but there are allowances available that should be utilised.
- There is a £3,000 annual allowance per tax year, that allows you to gift money to your children. This is a total amount, not per child.
- You needs to survive for seven years following the date of the gift for it to remain tax free.
- You can backdate gifts for one year, therefore contributing double in one year if none was contributed the year before
- It is also possible to make additional contributions to your children and indeed grandchildren if you can make the gifts “regular”.
Speak to a financial adviser to discuss how you can make regular gifts to your children and minimise the risk of having to pay IHT.
Minimising the effects of inflation
The topic of inflation needs careful consideration as it is important to ensure that all investments made on behalf of your children, or indeed for yourself, will survive the effects of inflation.
£10,000 investment today would be worth, circa £8,200 in 10 years, with inflation at 2% per year. Investments should grow by at least inflation each year, just to remain static.
Read more: Understand investment risk before investing
An affordable strategy
There are many ways for parents to help save money strategically to cover the costs of raising and educating a child or children, whilst avoiding paying unnecessary tax. Here we have looked at the main ones.
The sooner plans begin, typically, the more effective they become. Working with a financial adviser can help ensure your strategy is robust and takes into account your bespoke situation and budget.