How to ease the stress of family financial planning

3 June 2021

By Scott Palmer, Chartered Financial Planner

 

Starting a family is one of life’s most rewarding experiences, but it is also one of the most costly. The basic cost of raising one child to age 18, excluding childcare costs, is estimated to be just over £4,000 a year, according to the Child Poverty Action Group. Add in childcare costs and additional housing costs and this doubles to £8,000 a year. Multiply that by the number of children you have, and you can see how quickly you need to count the pennies.
 
On the birth of a child, parents’ thoughts often turn to saving to give them the best start to adult life. This can be investing for education costs, a child’s house deposit or wedding, ensuring your family will be taken care of should anything unfortunate happen, or even saving into a pension for children. Help can come from other family members such as aunts, uncles and grandparents, as passing wealth down the generations has become increasingly popular.
 
Not only does saving for a child give them a start to their adult lives with savings in hand but getting kids involved with saving early also helps them learn important lessons about money.  It is also a chance for parents to think about the future and how to steer children through the financial challenges they face as they grow up.
 
The good news is the stress of family planning can be eased with sound financial planning.

 

Where Do I Start?
 
The first part of any family financial plan is creating a written plan that includes a budget and considers short-term and long-term savings. Budgeting is the cornerstone of any financial plan and tracking spending can help to fine-tune your budget and avoid overspending.  Reducing spending in one area can free up money for family financial planning.
 
Budgeting also helps to see how starting a family affects income. Not only will income reduce when taking time out of work to raise a family, but the cost of childcare will also come as a shock to many.  According to the Money Advice Service, the cost of sending children under the age of 2 to nursery part-time is around £7,160 a year. For full-time, this increases to around £13,676 a year.

 

What If I Get Sick or I’m Not There to Care for Them?
 
It’s not a subject any of us like to talk about, but it is certainly one of the most important. If you or your partner were to fall ill or die, would there be adequate financial support for your family?
 
Many young families often depend on a single income and some form of protection for those earnings can be essential. Income Protection can provide for your family if you are unable to work through illness or injury, and they usually pay up to 75% of your current income until you resume working, retire, die or reach the end of the policy term.
 
Life assurance policies pay a cash sum to provide financial security for your family on death.  If you are employed, it is worth checking to see if your employer provides life assurance as part of your benefits package. It is also worth assessing whether they are sufficient so you can identify any gaps in order to preserve your family’s standard of living until your youngest child becomes financially independent. For the self-employed or those who do not benefit from an employer scheme, life assurance can be cheap and is readily available.

 

Saving for Education Costs
 
Once you protect your family, it’s time to think about saving.  The earlier you start the better, especially for families that aspire to put children into private education where costs are formidable, even for those on high incomes. According to the 2018 census from the Independent Schools Council, the average cost of private school fees across all age groups was £5,744 a term, or £17,232 a year. 
 
Saving smaller sums such as £50-£70 per month can help, as the money has a long time to grow and the power of compound interest can make a difference. These sums make even more of a difference over time if utilised for University costs. Where to save for education fees will depend on personal choice, but options can include:

• Children’s Savings Accounts
• Premium Bonds
• Junior ISAs

Premium bonds and children’s savings accounts might be suitable for those with a cautious approach to saving, with up to £50,000 allowed into Premium Bonds. Either route also allows grandparents to contribute. These options present security against falls in value, however returns can be low with cash interest rates at historic lows and Premium Bonds averaging pay-outs at around 1% a year.

Some may opt for Junior ISAs with a contribution limit of £9,000 a year in the tax year 2021/22. Those with an appetite for higher risk can utilise a Junior Stocks & Shares ISA to seek potentially higher rates of growth, although values can go down as well as up.  A Junior ISA comes under the control of the child at the age of 16 for investment decisions, but they cannot gain access to the proceeds until age 18. There is a danger, however, that the children do not utilise the money as parents intended.

 

Help onto the Housing Ladder

With first-time buyers finding it harder than ever to get a mortgage, more parents are giving children a helping hand onto the property ladder. Again, Junior ISAs can be helpful with the ability to save regular sums over the year rather than having to find a lump sum when the time comes. It is possible for a child to remain invested in a Junior ISA beyond the age of 18, or they may choose to withdraw funds each year to reinvest into a Lifetime ISA where they will receive a 25% government bonus on contributions up to £4,000 a year. Lifetime ISAs are specifically used towards either a first-time house purchase or retirement.

 

Retirement Planning

Finally, parents might like to take a very long-term approach and consider a child pension to kick-start their offspring’s retirement savings. It is never too soon to begin thinking about saving for retirement, even for your children.

Parents can contribute up to £2,880 each tax year and, with the government adding £720 if you contribute the full amount, this can bring the total annual contribution to £3,600.  Although the pension transfers to the child at age 18, they cannot access the money until they are well beyond their teenage years, avoiding previous parental dilemmas.