Helping your children financially - will it help, or hinder?

For my family, university still feels comfortably far away, but I have a few clients whose children are leaving home this autumn, and it makes me think about how quickly those years pass.

September has a way of doing that. One minute you’re buying school shoes and wondering how they already need another pair; the next, you’re helping them pack up everything they need for this next stage and thinking about what they might need from you now.

When you know you could help, it’s hard not to start mentally solving things for them.

University costs, a first home, some of the financial worries you remember having at their age… But as those possibilities add up, so does a harder question. Not “Can we afford to help?” You can.  More often: “What will the help do to them?”

It sounds like a question about the child. It’s usually a question about us as well.

Last year, Rathbones asked parents with average wealth of more than £3 million how they felt about passing it on. 75% believed leaving too large an inheritance could become a curse on their children’s lives. Nearly two-thirds said they would make access conditional on achievements. 

The reasons behind it vary enormously. Some worry it will be poorly invested or spent irresponsibly. Some feel their children already have enough and would rather it did good elsewhere. Some worry about the effect it might have on their children’s ambition. Some want to see it make a difference while they’re here to see it.

Every one of those is reasonable. It’s a difficult balance: you want to give them choices, but you also want them to have the confidence that comes from making their own way.

So, where do we start?

Time is the one gift they can’t buy later. It’s easy to think of helping as something we do when the need arises, but it can begin long before then, while they’re still young and the money has plenty of time to grow. If I could find another 18 years of growth for my pension, I’d be delighted! None of us gets that time back, but our children and grandchildren have it in abundance and modest amounts can achieve remarkable things with it.

If £100 were invested each month for 18 years, the family would contribute £21,600. But inflation doesn’t wait while it grows. At 3% a year, that money needs to reach around £28,500 just to buy what it bought when you paid it in. Left in cash and earning less than inflation as it has for much of the past 15 years, it might reach £26,000 assuming a cash return on average of 2% each year. That looks like growth but the £21,600 you put in would now buy what about £19,600 did at the start - 18 years of careful saving and it has quietly shrunk.

Assuming an illustrative average return of 5% a year after charges, it could grow to around £35,000 with the spending power of £26,000. At 7%, around £42,000 with the spending power of around £32,000. These returns are not guaranteed, and investments rise and fall. But it shows what can happen when even a fairly modest amount is given enough time to compound.

Cash can be appropriate when something will be needed soon, and its steadiness can feel reassuring. Investing introduces risk, but over 18 years, the gap between cash return and investing is the price of feeling safe. 

What that help can look like

A Junior ISA is usually the option families turn to first. It can hold either cash or investments, and up to £9,000 can currently be contributed each tax year. A parent or guardian needs to open it, but grandparents and other relatives can pay into it too.

You do need to be comfortable with the fact that the account belongs to the child. They can take over managing it at 16 and access everything at 18. That may be exactly what you want if the money is intended for those first few years of adult life, but an 18-year-old may not spend it quite as you imagined - once it becomes theirs, you can’t insist that it goes towards a deposit rather than a very ambitious summer holiday!

A pension for a child sits at the other end of the scale. Retirement feels absurdly far away, which is probably why this option is often overlooked, but a child doesn’t need to be earning for you to pay into one. You can currently contribute £2,880 each tax year, which the government boosts to £3,600 with basic rate tax relief.

They will not be able to use that money for university or a first home, as it will normally remain unavailable until they reach the minimum pension age that applies in the future. That lack of flexibility is the drawback, but it also allows the money to remain invested for decades. For a generation unlikely to have the same access to generous defined benefit pensions as some of their grandparents, that early start could be incredibly valuable. You don’t need to choose between the two either: a Junior ISA could provide money at 18, while smaller pension contributions build something for much later. 

For grandparents, it can be part of your own plan.

If you have income left over each year, regular gifts from that surplus income may qualify for an Inheritance Tax exemption straight away, provided the relevant conditions are met and good records are kept.

With unused pensions coming into the Inheritance Tax net from April 2027, that quiet, regular kind of giving deserves a second look.

Money makes more sense when we talk about it

Choosing the account is only one part of it. If a child reaches 18 with access to a large Junior ISA (say £35,000) they have barely heard about, we are asking them to make a very grown-up decision without ever having had much chance to practise.  Yet their money story is being written long before the money arrives, mostly by watching us.

I’m not suggesting we sit our young ones down with the family balance sheet… But it can start naturally, by explaining why we save some money and invest some of it, and why the number goes down in some years, and why we don’t panic when it does.  What the money is actually for.  And as they grow, we can bring them a little further into the conversation, so that when the money becomes theirs, it doesn’t feel completely unfamiliar.

I think this is where legacy planning can become a little too focused on the money. We can spend years working out the most efficient way to pass it on, whilst the person receiving it may never have had a proper conversation about what it means. So the plan needs to include them too.

If this has made you think about what you might put in place for your children or grandchildren, please get in touch - I’d be very happy to talk it through with you.