Welcoming a new child or grandchild to the family is a blessing. Of course, along with the joy comes the responsibility of caring for them – and that includes their financial security.
Having just welcomed new addition Patrick to his own family, our planner Mike is in the ideal position to share his thoughts about what you can do to support a new arrival.
Over to you, Mike!
Our new arrival, baby Patrick
I’ve recently become a father, and my son is two weeks old as I write this. In between changing nappies, burping him, and generally trying to support Mrs Thompson with keeping the wee one alive, I thought I’d share a few little steps I’m taking to shore up his financial future.
The first and most important step is to budget, as babies can be expensive. In fact, the Child Poverty Action Group say that, in 2020, the additional basic cost of a child including housing and childcare costs, from birth to age 18, was an eye-watering £152,747 for a two-parent family.
To make life a little easier you should re-evaluate your household budget and think about where you may end up spending more, and where you may spend less. For example, you’re probably not going out to dinner for a few months!
Remember, it’s not just formula and nappies you’ll need to consider. There are also childcare costs for when you return to work, and other various lifestyle changes.
Something I have learned very quickly is that you don’t need to spend thousands on clothes they won’t be wearing for more than a brief moment. At two weeks old, he’s already out of the newborn clothes and into the 0–3 months!
Securing your child or grandchild’s financial future
Now on to finances.
It may seem an odd thing to say for a child less than a month old, but Thompson Junior already has a pension. While he won’t be able to access this for more than 50 years, he’ll benefit from the effect of compound interest, which means he’ll be rewarded with growth on growth for decades.
We can pay up to £2,880 a year into this, so any presents people wish to make will go straight into this, particularly for the first few years when a cardboard box can be just as enthralling as the latest Xbox (assuming he can hold the controller, unlikely for a two-week old – I’ve tried!).
With tax relief of 20%, this will mean a total of £3,600 a year in his pension.
As he is a child under the age of 16, he will need to have an adult on the pension policy. We manage this in the same way as your own pension.
Assuming he saves the same for the next 50 years, and assuming an annual growth rate of 5%, he can expect the better part of £750,000 in his pension when he retires, before we look at any workplace contributions.
Patrick will also have a Junior ISA to fund the important things, like his first car, his university education, or getting on the property ladder. We can contribute £9,000 in the 2022/23 tax year to this, and it will grow free of Income Tax and Capital Gains Tax until he accesses it at the age of 18.
Interestingly, grandparents are able to make contributions to both pensions and Junior ISAs. While the grandkids will benefit from the tax relief, this is a very efficient way of building wealth for the next generation.
As a society we focus a lot of our attention on passing on wealth to the next generation. However, I would encourage any parents and grandparents to reframe the objective and instead ask “how do we build a legacy for our children and grandchildren?”
This might be by gifting money while you are alive. As well as the positive benefit of being able to see your gifts in action, it can also potentially help you to mitigate an Inheritance Tax bill.
Starting early can help you to build a valuable savings pot for a loved one. If you’d like to find out more, our comprehensive guide to how to build a nest egg for children and grandchildren has some great tips.
Or, if you’d like to find out how the steps I’ve taken could benefit the young ones in your life, please get in touch.
Email firstname.lastname@example.org or call us on 01189 876655.
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.