A new child is a huge milestone for any family. Whether you have become a parent or grandparent for the first time or you’re a seasoned pro, a new arrival brings both joy and additional responsibilities.
Ensuring your new child or grandchild is protected is one of your key roles. In financial planning terms there are two main strands to this:
- Protection in the traditional sense – i.e. ensuring you have arrangements in place to make sure the child will be financially secure if something happens to you.
- Savings – ensuring that your family has the financial means to bring up your child and to provide for them.
Here, we look at some ways that you can fulfil your financial responsibilities to a new child.
Taking a holistic view towards protection
Back in the day, when we did our core financial adviser exams, the generally held view was that protection was one of the first areas to be addressed when providing advice.
If an individual or couple had a mortgage, other debts or a family then we took a ‘risk-based’ approach to these issues and recommended appropriate life insurance products.
For example, if you’d become new parents it wouldn’t have been unusual for us to recommend a Family Income Benefit contract that, if you died, paid out a lump sum every year until your child was financially independent. If you had a mortgage, we’d recommend enough life assurance that your home loan could be repaid if you died during the mortgage term.
Nowadays, as Chartered Financial Planners, we take a slightly different approach. Rather than taking what might be called a ‘shock-based’ attitude, we want to know much more about a person’s aspirations for the future so that we can establish financial priorities.
Of course, many of these priorities will be related to your children – ‘pay for school fees’ or ‘send my daughter to university’ or even ‘help my son with a deposit on his first house’. However, your aspirations may also be to ‘retire early’, ‘travel the world when I stop working’ or ‘leave a legacy to my grandchildren’.
We then take the following steps:
- Establish your life goals – your aspirations, the lifestyle you want to enjoy, and anything else you want to achieve within your lifetime
- Convert these goals into financial targets
- Test using ‘what if?’ scenarios
One of these ‘what if?’ scenarios might be your premature death. So, by using sophisticated cash flow planning software, we can work out where there might be shortfalls in capital in the future, based on certain events.
We can test a range of scenarios to determine where you may need additional capital if you were to pass away. For example, if you were to die when your child was young, you may need an injection of capital at this time to ensure the rest of your family’s aspirations (paying school fees, repaying your mortgage, sending your child to university etc.) are met. In this case, we may recommend some appropriate life insurance.
This approach means that it’s not just specific ‘risks’ that are protected, but rather all your life goals and aspirations.
Save into a Junior ISA
If you want to build up a tax-free lump sum for your child or grandchild, a Junior ISA could be ideal.
A Junior ISA works in a similar way to an adult ISA and there are two choices:
- Junior Cash ISA – a cash-based account which earns interest with no tax deducted
- Junior Stocks and Shares ISA – invest the child’s money in shares, funds, investment trusts and corporate bonds. As with an adult Stocks and Shares ISA there is an element of risk and the value of the child’s investment can go down as well as up.
The annual limit for a Junior ISA is lower than for the various ISAs on offer for adults. In the 2019/20 tax-year you can contribute a maximum of £4,368 (equivalent to £364 per month). Unlike an adult ISA, you’re only allowed to have one Junior Cash ISA and one Junior Stocks and Shares ISA. So, if you find a better interest rate, you have to transfer the total value of your ISA into the new account.
One of the main advantages of a Junior ISA is that while a parent must open the account on behalf of their child, anyone can contribute to the account. So, if you’re a grandparent, you can make a lump sum or regular contribution to your grandchild’s tax-free savings.
The child can’t access any money invested into their Junior ISA until they are 18 years old. After this point, the Junior ISA becomes a full ISA and the adult limit (currently £20,000) applies.
A more complicated way to save for your grandchild is to set up a trust. You can invest for the benefit of your grandchild with a lump sum considered a Potentially Exempt Transfer for Inheritance Tax purposes. You retain control of the money until your grandchild is 18 which makes it an ideal way to pay for school fees.
Get in touch
If you’d benefit from advice regarding your protection or savings needs, please get in touch. Email firstname.lastname@example.org or call us on 01189 876655.