Financial planning for your new baby

Parents kissing their young child on the cheek

There’s no avoiding it, parenthood is pricey. But clever financial planning helps, and it pays to think long term and tax-free.

By Judith Parsons

They say ‘the littlest feet make the biggest footprints in our hearts’. Well, those feet also make the biggest footprints in our finances. Couples pay an average of £22.95 every day to raise a child from birth to 18 years of age, according to The Money Charity. And if you’re a lone parent, that figure rises to £27.90.

Add it all up and you’re looking at £150,753 for a couple and £183,335 for a single parent. That’s according to Professor Donald Hirsch, author of The Cost of a Child in 2018, published by the Child Poverty Action Group. It’s based on the Minimum Income Standard, which assumes an adequate but no-frills lifestyle.

Many new parents consider the immediate costs of cots and car seats rather than the financial twists and turns their child faces in the years to come. That’s why sitting down to create a road map for your child’s financial future makes sense.

How compounding can protect your child’s future

Long-term investing provides many ways to provide financially for your new arrival. Starting early can give you a huge advantage. Even minimal amounts tucked away regularly will add up, especially if you reinvest any interest. 

Thanks to the power of compounding, every £1 you save today will be worth much more in the future. No wonder Albert Einstein described compound interest as the eighth wonder of the world!

Sharon Bradley, owner of Pantmeillionen Holiday Cottages in Wales, is investing in the long-term for her son. “Since my son Finn was born, I have put £40 every month into The Child Trust Fund. As a result, when he is 18, he should have a decent sum for things like university, a car or property and this makes me happy.”

There are pros and cons to every investment tailored to children, whether they’re discretionary trusts or child savings accounts. A good starting point is to explore your long-term tax-free savings or investment options. 

For example, you may already have an Individual Savings Account (ISA). This lets you put aside £20,000 a year without paying a penny in tax on the ISA product.  

That’s what Sinead and Tom Evans, owners of new glamping business Wild Wellingtons, are doing for their two boys. Sinead says, “As we are starting up a new venture, we are conscious that we’re not able to invest specifically for our children, but have made a concerted effort to pay off all debt. We are, however, in a privileged position and very grateful to the grandparents who are providing a cushion for the boys’ future with an ISA.” 

Lay the foundations for your child

As you can draw money out of your ISA, you might be tempted to dip in for a bit of cash here and there. One way to avoid this is to open a Junior Individual Savings Account (JISA). 

Only a parent or legal guardian can open this account – but crucially, they can’t access any of the money inside. And although it belongs to your child, they can’t withdraw from it until they are 18 either. 

Even better, anyone can pay into your child’s JISA -including generous relatives. This makes it much easier for you to save tax-free on behalf of your child. 

You can put £4,386 each year into a Cash JISA or Stocks and Shares JISA, or both. Once your child reaches 18 their account rolls over into an adult ISA, which they can then access. 

Money in an Investment JISA generally outperforms that saved in a cash one in the long-term. However, as the Money Advice Service cautions: “Investments are riskier than cash but you could give your child a bigger profit. However, the value of a Junior Stocks and Shares ISA can go down as well as up.” 

Family values

If you feel ethical values are as important as saving for your child’s future, there are investment options supporting that too. With a Wealthify Junior ISA, for example, your money is invested in companies making a positive impact on society and the environment. 

You don’t need to be an experienced, overly cautious or even adventurous investor to get involved. There are several options to match your attitude, which Wealthify manages for you. 

Alternatively, you can help your child out later in life with a pension. Any parent or legal guardian can set up a personal or stakeholder pension or a junior self-invested personal pension (SIPP). A junior pension will give your child an enviable head start post-employment, including a 25% tax-free lump sum. 

Tax-free gifts for your children

If you have already taken advantage of yours and your child’s tax-free allowances and feel lucky, take a look at National Savings and Investments (NS&I) Premium Bonds. They don’t offer interest, but you could win in the monthly tax-free prize draw between £25 and £1 million. 

You can purchase a minimum of £25 or a maximum of £50,000 in bonds, and you’ll receive a unique bond number for every £1 you invest. Every number has a separate and equal chance of winning a prize, so the more bonds you buy the better your chances! 

Protect what matters

As a new parent, you do everything possible to keep your baby safe and secure. However, unexpected illnesses, accidents and job losses can make it harder to meet mortgage payments. That’s why life insurance with the right cover can help you protect your child – no matter what life may throw at you.

To help you take the first step, every parent with a child under four can apply for Aviva’s Free Parent Life Cover. We give each parent £15,000 worth of cover for each child (that’s £30,000 for two parents) for a year, providing you are a UK resident and have not had cancer treatment in the last 12 months.

As Danielle Duggins, parent and blogger at someonesmum.co.uk, says: “There are so many different policies that many may feel it is easier to bury their heads in the sand. Aviva’s Free Parent Life Cover gives peace of mind, is incredibly simple and means you have time to relax and get to grips with that world-changing bundle of joy, before looking at further insurance options.

“As the parent of a child with extra needs, we know that we cannot take any chances when it comes to making sure our family is protected.”

Taking care of your child’s future can seem daunting at first. But with the long-term investment ideas we’ve shown you here today, you’re giving your new-born the great head start – and for their entire life to come.