The cost of raising a child from birth to age 21 is a massive £231,843 according to the most recent research¹. That’s more than the cost of an average semi-detached house in 2016! How do the costs add up and how can you use your money wisely to help make this figure more manageable?
Whether it’s giving a little bit of pocket money here and there, or saving for something more substantial like school fees or car purchases, the costs all add up. Just as importantly, what are the tax and inflation consequences of the various options available that’ll help relieve the financial burden of these eye-watering costs?
The cost broken down by expenditure area
Here’s how the £231,843 adds up (you may need to scroll left and right if you’re viewing the table below on a small screen):
|Expenditure Area||Estimated Cost|
|Childcare & Babysitting||£70,466|
|Hobbies & Toys||£9,307|
|Leisure & Recreation||£7,464|
* Does not include private school fees but does include day-to-day costs associated with going to school (e.g. uniform, school lunch, school trips, text books) and university fees. † Includes driving lessons, first car, birthday and Christmas presents.
Clearly, childcare and education (principally university) are the biggest costs at over £70,000 each. If your child or grandchild goes to a private school, that could add, on average, £141,863 for day pupils and £260,927 for boarders.
What can you do to help pay these alarming costs?
From committing a lump sum to contributing a regular payment, ways that you can help relieve the financial burden of having children include:
Short Term Savings Accounts & Bonds
A low risk option offered by most high street banks and building societies, as well as the Government-run National Savings and Investments (NS&I). Some will allow you to open an account for the child from birth; others may have an older minimum age requirement.
As of April 2016, the first £1,000 of interest earned on savings each year is tax free for basic rate tax payers, reducing to £500 per year for higher rate tax payers (those earning between £46,350 and £150,000). For those earning over £150,000, the personal savings allowance is removed.
Although children have historically been able to save and not pay tax on interest earned up to their basic rate tax allowance, the personal tax free savings allowance means that they’re able to save more on deposit before paying tax on the interest earned.
However don’t forget, if a parent gives money to a child and that money produces an income of more than £100 a year (£200 if the parents invest jointly), this income will be added to the parent’s taxable income. This does not apply to grandparents investing on behalf of their grandchildren; something that might be worth subtly mentioning to the doting grandparents!
Junior Individual Savings Accounts (Junior ISA)
A long-term tax free savings option for children under 18. The account belongs to the child and he/she has full access to it when they are 18. Until then, the money cannot be touched.
You can add up to £4,260 a year (the 2018-2019 Junior ISA allowance) to the account. As long as you and the child are UK residents, neither you nor the child will pay tax on any income or profits the account makes. It also doesn’t affect any benefits or tax credits you receive.
Children who have a Child Trust Fund cannot also have a Junior Cash ISA but you can transfer the full balance of a Child Trust Fund into a Junior ISA.
Unit Trusts & Investment Trusts
Collective investments, such as unit trusts and investment trusts, pool the money of many investors to buy a broad mix of shares, thereby reducing the risk of investing in the stock market.
Pensions for Children
If you invest in a stakeholder pension on a child’s behalf, the Government will add basic rate tax relief to the amount you pay in.
You can only add £3,600 a year or £240 a month (when tax relief is factored in) to the child’s pension account and he/she will not be able to access the funds until they reach retirement age which, at the moment, is 55.
Family Trust Fund
You can use a family trust fund to look after any money you have allocated to a child and/or provide an income for children who cannot manage their own affairs.
Setting up a trust is complicated and can be expensive so you may want to work with a solicitor or tax adviser. You also need to tell HM Revenue & Customs if you set up a trust.
What about…inheritance tax?
An individual can gift up to £3,000 per tax year inheritance tax free, called the ‘annual exemption’. Any unused annual exemption can be carried forward to no more than the next tax year. For example, if you didn’t give a gift last tax year, you could gift up to £6,000 this tax year.
You can also give away other small gifts each tax year, but only if they meet the HMRC exemption criteria.
Gifts in excess of the annual exemptions may be subject to inheritance tax if you don’t survive a full 7 years from the date of the gift. Any gift(s) outside the exemptions may use up part of your nil rate inheritance tax threshold i.e. the amount up to which an estate will have no inheritance tax to pay. The nil rate inheritance tax threshold in 2018-2019 is £325,000 (ignoring the residence nil rate band).
Any gifts in excess of the nil rate threshold are subject to inheritance tax at 40%. However, if you’re passing on a home, or if you’re married or in a civil partnership, you may be able to leave more than this before paying tax.
Inheritance tax can be complicated so if you’re looking to make regular gifts to your children or grandchildren, it’s worth checking whether or not they fall within the rules governing gifts out of normal expenditure.
When considering any savings or investments over an extended period, it’s important to factor in how inflation plays a part in your money’s future value. If you were to stuff a child’s piggy bank with £10,000, how much would it be worth in 20 years’ time? You may need to scroll left and right if you’re viewing the table below on a small screen.
|Inflation Rate||Purchasing Power of £10,000 after 20 Years|
This table assumes that inflation is constant over the 20 year period, applied annually and compounded over time. There is no interest included in the calculation so savings on deposit would not decrease by the same amount, and would increase in value in real terms if the rate of interest was higher than the rate of inflation.
So what’s the answer?
There are clearly many different ways you can help bear the financial cost of having children. Which is the best option for you and your children depends on many factors, not least your own personal budget.
Whatever you decide, don’t leave yourself in a position where you’re unable to sustain your own lifestyle by contributing an unaffordable sum towards your children or grandchildren’s future financial wellbeing.
To clarify how much an affordable sum is, speak to your financial adviser.
As with any equity based investment there is always risk involved. Investment means that your capital is at risk and the value of investments can fall; you may therefore get back less than you invested. Past performance is no guide to future performance. There is no guarantee that the tax efficient nature of any investment will remain.
Which, if any, of the above savings and investment options do you use to help manage the cost of bringing up your children and/or grandchildren? Let us know by adding a comment below.
Source: ¹ LV=