Building for the future is child’s play

Life isn’t like that though, as adults know all too well and today’s children face a financial baptism of fire when they grow up, thanks to student debt, squeezed salaries and stubbornly

high house prices. Here’s how to help your little ones reach financial maturity in the real world. Savings One in four six-year-olds believe £10 is enough money to pay for everything they

needed in life, according to L&G. Sadly they will need a lot more than that. ** CLICK HERE TO CLAIM A FREE COPY OF ONE OF OUR MONEY & FINANCE GUIDES ** A good way to educate them

about money is to open a children’s savings account in their name says Christine Newton, a financial planner at Census Financial Planning. “They can pay in any cash they get for their

birthday or Christmas and learn how to manage their own money and work within a budget.” You can find the best savings rates by visiting a price comparison site such as Moneyfacts.co.uk.

Northern Rock’s Little Rock Access account pays 3 per cent on £1 and above for example. For more serious long-term saving you should set up a tax-efficient junior individual savings account

(Jisa), which allows family and friends to invest up to £3,600 a year for children and grandchildren. The money grows free of tax until the child turns 18, when the Jisa belongs to them,

says Simon Ellis, managing director at Legal & General Investments. “They can spend it on university fees, their first car, a deposit on their first home or transfer it into a tax-free

adult Isa. This will give them a financial head start in the adult world.” You can divide your contributions between cash and shares. Again, shop around for cash Isa rates. Nationwide’s Jisa

for example, currently pays a variable 3.25 per cent on £1 and above. You may get a higher return from investing in stocks and shares according to Tim Cockerill, investment researcher at

advisers Rowan Dartington. “There is a tendency to be cautious with children’s money, but over 18 years the stock market should make your money work harder. Just make sure you understand the

risks.” You can choose from a bewildering range of investment funds but Cockerill says the following three funds are a good place to start. M&G Global Equity. This fund invests in a

wide spread of international companies. M&G Recovery. A well-established UK fund with a good manager and long-term investment horizon. Aberdeen Emerging Markets. Invests in emerging

economies such as China and India where growth rates are likely to be faster. If you have previously set up a child trust fund you cannot take out a junior Isa as well. Pension As life

expectancy grows, today’s children can expect to live into their 80s, 90s and beyond. Saving a big enough pension is a massive challenge, but far-sighted parents can set the ball rolling

today. Any pension contributions you make today will have more than half a century to grow in value and they could be worth a hefty sum by the time your child or grandchild retires. If you

start paying £83 a month into a self-invested personal pension (SIPP) when your child is born they could have a pension pot of £1 million at retirement, says Steve Latto, head of pensions at

Alliance Trust Savings. “This assumes the investments grow by 7 per cent a year on average. Your child will also need to contribute a similar sum throughout their adult life. “Inflation

will also have eroded the real-term value of this money.” You can pay up to £2,880 into a child SIPP a year. Claiming 20 per cent tax relief on contributions adds £720, taking the total to

£3,600 a year. In practice, most children will have more pressing financial needs. Mortgages If you have older children, they are likely to want financial help today and most young people

simply cannot afford to buy their first home without financial backing from their parents, says Mark Harris, of mortgage broker SPF Private Clients. “Mortgage lenders increasingly recognise

this and are making it easier for parents to help.” The Lloyds TSB Lend a Hand mortgage is a popular option. “The child puts down a 5 per cent deposit and the parents put the equivalent of

20 per cent of the house price in a savings account with Lloyds,” Harris says. “This allows the child to qualify for mortgage rates that are usually only available to those with a 25 per

cent deposit. Rates start at 4.19 per cent for a three-year fix, with £1,094 fee.” National Counties Building Society’s Family First Guarantor Mortgage allows a parent or grandparent to act

as a guarantor for the child’s mortgage using their own property as security. “It offers a two-year fix pegged at 4.69 per cent with a £495 fee. This is available up to 95 per cent

loan-to-value.” Bath Building Society’s Parent Assisted Mortgage also allows parents to act as a mortgage guarantor. “It offers a three-year fixed rate of 5.29 per cent with a fee worth 0.5

per cent of the property value and a non-refundable £100 administration fee,” Harris adds. Chelsea Building Society offers an offset mortgage that allows parents to put money into an easy

access savings account linked to the child’s mortgage, reducing the mortgage interest rate. To avoid nasty shocks, parents and grandparents should seek advice before allowing a lender to

take a charge over their own property. This could limit your ability to raise funds in your own name at some later date and your own property could also be a risk if the child cannot keep up

with repayments. You must also decide whether you want the money back or whether it is a gift for your child. Equity release Growing numbers of homeowners are turning to equity release to

help young family members. Equity release allows you to unlock the capital value of your home and turn it into cash. Older homeowners typically use it to boost their spending power in

retirement. However, almost one in four now give some of the money to their children or their grandchildren, says Steve Wilkie, managing director at equity release specialists Responsible

Equity Release. “Homeowners have given nearly £400 million to their children or grandchildren over the last two years, to help them pay school and university fees, clear debts, fund a

wedding and most commonly of all, put down a deposit on a property,” he says. Equity release allows older people to give their loved ones an early inheritance, Wilkie adds. “Many people now

get their inheritance when they are middle-aged or even retired. “Equity release brings that inheritance forward to an earlier age when you may really need it.” However, be aware that taking

out equity release is a complicated decision and you will need to take independent financial and tax advice, Wilkie says.AN inheritance is the biggest financial boost you can give your

children and you don’t have to wait until you are dead, explains Matthew Stephens, tax expert at Prudential. Within limits you can give your children or grandchildren tax-free gifts while

you’re alive. “You can make gifts of up to £3,000 a year and they will be exempt from inheritance tax when you die,” says Stephens. If a 50-year old man with an average life expectancy gives

away £3,000 a year he will have gifted £99,000 by the time he dies at age 83, Stephens says. “If his wife did the same she would have gifted £105,000 by age 85. That’s a total of

£204,000.”Assuming this was subject to 40 per cent inheritance tax, they would also save £81,600 worth of tax. You can further reduce the inheritance tax bill on your estate when you die

through careful planning, such as setting up a family trust. “This means that you can leave even more money for your children,” Stephens says.