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How to... Look after your children's finances

GPs can protect their children's and their grandchildren's futures by planning ahead. By Phil Mileham

More and more children are relying on their parents to fund key stages of their lives, such as university (Photograph: Istock)
More and more children are relying on their parents to fund key stages of their lives, such as university (Photograph: Istock)

'The bank of mum and dad' is becoming an increasingly common term as growing numbers of children call on their parents for financial assistance at key stages in their lives.

Click here for our Personal Finance Podcast - Bank of Mum and Dad

These stages are numerous: paying school fees, going to university, travelling, putting down house deposits and even helping to bring up grandchildren.

The changing social and economic climate is making the situation ever more difficult. Going to university leaves the average final year medical student with a debt of more than £20,000. Getting on the property ladder requires the average first-time buyer to put down a deposit of £34,000.

No wonder then, that according to the Council of Mortgage Lenders, 80 per cent of first-time buyers rely on their parents to get on the property ladder.

Take the right approach
If you start planning early enough, you will be relieved to hear that there are a range of investments and options to help you support your child through the different stages of their life, without breaking the bank.

Before selecting what type of investment you wish to make, it is important to ask yourself a number of questions to ensure that you make the right choice for your personal circumstances and that the money is available when you need it most.

Important questions
You need to ask yourself the following:

  • When will I need access to the funds? It is important that the money you put aside is available when it is needed. For example, pension provision is a long-term investment, but funds for school fees will be needed much sooner.
  • How do I want to access the funds? When you decide to cash in an investment you might want to take out the whole amount as a lump sum if, for example, you are saving to help provide an adult child with a deposit on a house. But you may prefer to receive a regular income via, for example, an annuity, if you will be paying for university costs.
  • What is my attitude to risk? If you are investing for the longer term you may feel comfortable taking more risk with your money, accepting that, while there may be fluctuations in the value of the investment, the potential for growth is greater. For short-term investments you may prefer to consider a lower level of risk.
  • How do I want to control my investment? Do you wish to maintain full control of the funds and ensure they are used for the purpose they are intended for? Or do you wish your child to have autonomy, and allow them control of the funds.

Once you have considered these questions and decided what your preferences are, you will be ready to examine some of the numerous investment options available to you - see below for some of these.

Child Trust Funds
For GP parents who have already opened a Child Trust Fund (or who will be eligible to open one soon), these accounts can offer a useful, tax-efficient means of saving for children.

Child Trust Funds are being scrapped under plans announced recently by the coalition government, although accounts opened before January 2011 are being allowed to continue and to receive top-ups of up to £1,200 per year.

The first funding cuts to these funds on 1 August 2010 mean that children born after this date will receive £50, instead of £250, as the initial government contribution. After 1 January 2011, government payments will cease altogether.

Individual savings accounts
Tax-efficient individual savings accounts (ISAs) give you great flexibility. If you invest in your own name, you can retain full control over the funds and decide where the money is put to use - whether it is for your children's education, a property or your own retirement. Children over 16 can also hold cash ISAs in their own name.

The annual ISA allowance rose by almost a third earlier this year to £10,200, and you can put all of this money into a stocks and shares ISA. Alternatively, you can put up to £5,100 into a cash ISA, with the remainder available for stocks and shares.

It is worth noting that although ISAs are tax-efficient they will still form part of your estate if you invest in your own name, so the funds would potentially be exposed to an inheritance tax (IHT) charge if you die.

Setting up trusts
Trusts are a great way of protecting your assets during your life and after you pass away.

They can provide financial security for your children, give you more control over when and how to use the money, and are a good way to earmark investments for different purposes.

It is important to consider what type of trust is right for you. You can set up a trust during your life and, through your will, even on death. The funds can be controlled by trustees (including you while you are alive) and distributed to the relevant people - your children or grandchildren - when they are needed. Using trusts can also help to reduce IHT.

Other investment options
The choices above are just a snapshot of what is available to help you provide for your child's future.

You can also choose from a wide range of other options, including National Savings, child saving accounts, collective investments, such as unit trusts, or ask the children's grandparents for financial help.

You should consult a financial adviser to help you make the right decisions for your and your children's personal circumstances.

Planning ahead will help set your mind at rest and ensure that you make the right decisions, not just for your child, but for you too.

  • The above does not constitute financial advice and is for general information only
  • Phil Mileham is national sales manager at Wesleyan Medical Sickness, www.wesleyan.co.uk
Dos and Don'ts

Do

  • Take note of the coalition government's plans to abolish Child Trust Funds.
  • Keep an eye on tax legislation and consult with a professional.

Don't

  • Leave it until it is too late. Investing for children is all about the long term, so give your savings as much time as possible to grow.
  • Invest without knowing when and how you will want to access the funds.

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