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Personal Finance - Welcome to the bank of Mum and Dad

GPs with young families face supporting them well into adulthood, so plan ahead.

Junior ISAs should be available from 1 November and allow both parents and grandparents to contribute to a child’s account (Photograph: Istock)
Junior ISAs should be available from 1 November and allow both parents and grandparents to contribute to a child’s account (Photograph: Istock)

You knew when you had children that they would be a drain on your finances, but you probably did not expect the 'Bank of Mum and Dad' to be bankrolling them into adulthood.

It is difficult for young people to become financially independent once school is over, especially as universities in England can charge as much as £9,000 a year for tuition fees from next year.

In fact, going to university could leave medical students with a debt of at least £70,000 according to the BMA, which also estimates that most medical students rely on some £15,000 of parental support during their studies.

These are startling figures and it does not end there. Latest industry figures show that 84 per cent of first-time buyers rely on their parents to get on the property ladder - more than double the number in 2005. Some parents are even setting up pensions for children and grandchildren.

So what should you do? Don't panic but plan.

Plan ahead
The key is to start planning your finances as soon as you can.

The longer your can lock away your money, the more potential it has to grow.

Despite recent volatility in the stock markets, history has shown that share-based investments are more likely to outperform cash if you are investing for the long term.

There are a range of savings options that will help you support your children throughout their life without bankrupting yourself, but before you decide where to invest, ask yourself the following questions:

  • When will I need to access the funds?
  • How do I want to access the funds?
  • What is my attitude to risk when it comes to investments?

It is important that the money you put aside is available when you need it. For example, pension provision will be a long-term investment whereas funds for school fees will be needed sooner.

When you 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 your adult child with a deposit on a house. However, you may prefer to receive a regular income if you are paying university fees.

If you are investing for the longer term, you might feel comfortable taking a little more risk with your money accepting that, while there may be fluctuations in the value of the investment, the potential for growth is greater. However, for short-term goals you may opt for lower risk investments.

Once you have considered the questions above and decided on your preferences, you are ready to examine some of the options available to you.

Junior ISAs
Junior individual savings accounts (ISAs) are replacing the Child Trust Fund and are expected to be available from 1 November. The tax-free limit will be £3,600 and will increase in line with inflation from April 2013. Grandparents and others can also contribute to a junior ISA as long as the limit is not exceeded.

If you were to open one on the day your child is born and keep investing in it, they could have a sizeable sum at their disposal by the time they are able to access the money at age 18. They would be able to use the money for anything - university fees, a gap year travelling or a new car, say.

Junior ISAs have tax advantages, although parents may prefer to retain greater control over how and when their child accesses the money.

Individual savings accounts
Adult ISAs offer a tax efficient savings option and give you flexibility over accessing your money.

By saving into your own ISA, as a parent you can keep full control over the funds you are saving to aid your children - or for your own financial goals.

Cash ISAs are an ideal home for money that you will require in five years or less, while stocks and shares ISAs are designed for medium to long-term saving. The current ISA allowance is £10,680 of which up to £5,340 can be put into a cash ISA.

But remember that, while ISAs offer tax-efficient benefits, they will form part of your estate if you die before the money is used and thus could have inheritance tax implications.

Setting up trusts
Trusts are a great way of protecting and earmarking investments for your children during your life and even after you die. They can provide financial security for your children, give you more control over when and how they use the money and are a good way to assign 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 needed. Using trusts can also help to reduce inheritance tax.

Other choices
The choices above are a snapshot of some of the options available. There is also a wide range of alternative options, including cash-based investments such as bank/building society accounts and National Savings and Investment products and collective investments such as unit trusts.

Your children's grandparents may also want to help. They can make regular gifts to grandchildren that will reduce the size of their estate, thus helping to bring it below the inheritance tax threshold.

Discuss your options with a financial adviser to make sure you make the right decisions for you and your children.

  • Phil Mileham is national sales manager with Wesleyan Medical Sickness, www.wesleyan.co.uk

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