I have been talking to a wide range of parents over recent month about saving for their kids. One of the main points that comes up is the concern that their kids may not be financially responsible enough at age 18 and could therefore do something silly with their savings at that time.
When considering this issue, most parents look back at what they were like when they were 18 years old. In most cases they remember being with friends, going to parties, trying new experiences and making some choices they now know weren’t the smartest!
These memories, whilst they were fun, lead a lot of parents to worry about what their kids will be like at 18. Especially if they have been putting money in to a savings account in their kid’s name as those savings will automatically transfer when they become 18.
Imagine, you make the sacrifice to save each month for your kids over many years and then they get the money at 18 and spend it in an irresponsible way.
Some parents also fear their kids could become a bit lazy if they are given a pot of money. A few thousand pounds is a lot of money for an 18 year old. These parents want to have some control in order to ensure that their kids are financially responsible and hard working before being given their savings.
With these worries in mind, what can you as a parent do?
There are essentially three options:
Educate your kids about money and hope that they will do the right thing
Set up a bespoke trust structure so you, the parents, can retain control for longer
Keep the savings in your name to retain control, i.e. keep the savings in the ‘Bank of Mum and Dad’
Each of these options have pros and cons. In this blog I set out my personal thoughts on each.
Before I do, I just want to say that there are a number of the points I raise below that relate to tax and I want to make it clear that I’m not a tax advisor so you’ll need to consider your own circumstances rather that rely on my general views.
ONE - Educate your kids about money and hope they will do the right thing
Ideally we’d want our kids to have their money in their own accounts as there are some clear positives about this approach. These include:
Clear separation of money. Your account is your money and their account is their money. Simple!
In the UK, if you are using your full adult ISA (£20,000 per parent in 2019/20) and then using a Junior ISA means you won’t be paying tax on their savings (up to £4,368 per year in 2019/20).
The worry that parents have is that savings accounts in their kid’s name will transfer full ownership to their kid at 18. This can’t be changed easily so if you want to reduce the worry about them spending it irresponsibly we need to ensure they are financially educated before they are 18.
In terms of educating our kids about money, this is something we should all be doing as much as possible from a young age so they can make good financial choices when they are older. Whilst financial education is not taught in all schools, there is a lot that parents can do to help teach kids about money as they grow. If you would like help with ways to help teach your kids about money then make sure you subscribe to www.bluetreesavings.com.
In addition to educating your kids about money, parents can ensure they tell their kids about their savings from a young age so they have plenty of time to realise that it hasn’t just magically appeared but has taken years to build, i.e. don’t save for them and then surprise them with the money when they get to 18. This will hopefully reduce the chances of them just using it all in one go. #SaveAndTell
For our daughters, we get them to visualise their savings as trees and ask them if they are just going to cut down their forest when they are older. This certainly works at this young age as they are very protective of trees given they are learning so much about the planet and sustainability at school. Hopefully this link and feelings between money and trees sticks with them as they grow up.
Despite educating them, under this approach it is still their money at 18. When we were 18, we probably knew the risks and consequences but probably still did somethings we wish we hadn’t. It means that this option is good but still comes with its risks. I would always like to be optimistic that my daughters will be smart enough not to waste it but I’ve not had to parent two 18 year old girls yet!
TWO - Set up a bespoke trust structure so parents can retain control
This option is nice in theory. It allows for parents to retain control as they are a Trustee, ensuring their kids only get the money when the parents believe they are ready. It also means the money is in their name so there are less issues about tax and inheritance.
The drawback to this structure is that you need to customise it and set up your own trust. This means going to lawyers and paying lawyer fees. If you are planning on giving your kids a very large amount (e.g. over £30,000) then this might make the costs worthwhile.
So a good theory but costly in practice.
THREE - Keep the savings in the Bank of Mum and Dad
This option is the best in terms of retaining control as the money stays in your name. You can then decide when you feel your kids are financially responsible to receive their savings. Or you could allow them access to different amounts at different times.
One benefit that some parents have mentioned about keeping the money in their name is that they can use the money if there is a family emergency. It means they can call upon all the family resources. If the money is locked up in an account under the kid’s name it is much harder to get access to that money. Whilst it could be argued that parents shouldn’t be using their kids money, for some it is a genuine need so they want to have that extra optionality.
Whilst this option is good from a control and flexibility perspective, there are other points to consider:
Tax (UK): If you aren’t using your full ISA allowance then there isn’t any real tax drag so using the Bank of Mum and Dad approach is unlikely to make much of a difference to the amount of tax paid.
However, if you are using all your ISA allowance and you have an investment portfolio which is generating a significant dividends and/or capital gains, then this approach is likely to have a tax drag on your kid’s savings. Essentially, you will be paying tax whereas if you use the Junior ISA you’d have the tax free allowance to use for your kids savings. As mentioned above, I’m not a tax advisor so please review your individual circumstances before making any decisions.
Inheritance: If you save for your kids in an account in your name then all the money, even if notionally held for the kids, could be subject to inheritance tax if you were to die before you give them their savings. In most cases, parents would hope to see their kids reach adulthood and well beyond, but this is a consideration, especially for older parents. Again, please seek specialist advice if inheritance management is a concern for your family.
Separation of money: There are also some other points which will vary by parents. For example, any future separation or divorce means having the kid’s money separate results in fewer issues regarding that pool of money. If held in the Bank of Mum and Dad then there is a discussion about the future of the Bank of Mum versus the Bank of Dad. Not a nice point to raise but sadly given divorce rates I thought I would mention.
Recording their savings: If you are using your account then you need to know how much each of your kids has been saving. This can be tricky when you allow for interest and, really tricky, if you are investing and regularly top-up.
For those that are just planning on holding your kids money in savings, then there are plenty of pocket money apps that can help with this.
For those that do want to invest for your kids (and frankly my personal opinion is you should be investing for your kids to make their savings work harder) then you could use the Blue Tree Digital Piggy Bank. It allows parents to use their existing investment account to save for their kids. It keeps track of how much is allocated to each family member and also logs what money was given to the kids, when and by whom. For more information on the Tool please see www.bluetreesavings.com/piggy-bank (there is also a guide for parents that want to invest but don’t have their own investment account yet).
The fear parents have about their kids not being financially responsible enough at 18 is a genuine one. There is no universal right or wrong approach to managing this risk. You need to decide what is best for you and your family.
Saying that, regardless of which route you take, educating your kids about money is a must. It helps make them more confident and less worried about money when they are old.
Make sure you are educating your kids about money as they grow up. Remember, money management is a key life skill that is not taught in most schools. Subscribe to bluetreesavings.com to make sure you don’t miss out on different ways to teach your kids about money.
Consider investing your kids’ savings to maximise the amount they could have when they are financially responsible. For more information on the basics of investing go to www.bluetreesavings.com/investing-faq
Thanks for reading!