In 2022, the estimated cost of raising a child from birth to age 18 was a massive £202,660. If you allow for the painfully high inflation of the last year, the current cost has risen to an eye-watering £223,2561. That figure does not even take into account the costs from age 18-21, which could include university fees, where an average 3-year degree costs £61,0002. Also, if you have taken the private education route for your children, this adds on average £217,542 to the total spend for a day pupil and £447,852 for borders each from reception and including Sixth form3.
I think it’s fair to say raising children is an expensive endeavour.
What’s the most expensive part of raising a child?
The data available on the costs of raising a child is pretty detailed. One cost subsection made me laugh, and it resonated as a Mum of two growing, sporty teenagers. Did you know the average cost of feeding a child between ages 0-3 is £3,839 pa? This figure gradually rises as they grow but then sharply increases between 15-18 years. I can testify to the validity of this. It’s like a swarm of locusts descending on the fridge several times a day, forcing me to dash to the supermarket with embarrassing regularity.
This increasing spend as they grow has also been magnified by inflation. Shockingly, in the Cost of living Crisis, some costs of raising a child have accelerated even more than the already eye-watering general inflation. For instance, clubs and social activities have risen in cost by 33% in the last year. Holidays by 17% and after-school and holiday care by 14%4.
What can you do to help pay these alarming costs?
From committing a lump sum to contributing a regular payment, there are many ways that you can help relieve the financial burden of having children. These include:
Short-Term Savings Accounts & Bonds
One of the few benefits of high inflation is the healthy cash deposit rates currently offered by most high-street banks and building societies. There are also Government-run National Savings and Investments (NS&I) to consider. Some will allow you to open an account for the child from birth; others may require an older minimum age requirement.
Since April 2016, the first £1,000 of interest earned on savings each year is tax-free for basic rate taxpayers, reducing to £500 per year for higher rate taxpayers (those earning between £50,001 and £150,000). For those earning over £150,000, the personal savings allowance has been 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 they can save more on deposits before paying tax on the interest earned.
However, don’t forget if a parent gives money to a child and that money produces an interest of more than £100 a year (£200 if the parents invest jointly), this income will be added to the parent’s taxable income. This rule does not apply to grandparents investing on behalf of their grandchildren, something that might be worth subtly mentioning to 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 will have full access to it when they are 18. Until then, this money cannot be touched.
You can add up to £9,000 per year (2023/24) 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 Junior ISA 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. However, you can transfer the full balance of a Child Trust Fund into a Junior ISA. As the Child Trust Fund closed to new applications in 2011, this will affect children over 12.
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. There are tax implications to consider here so seek advice.
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 carry through 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 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 gift date. 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 2023/24 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 the normal expenditure.
What about…inflation?
Having moved from a historically low inflation environment to one of quite the opposite in the last few years, it’s even more important to factor in how inflation plays a part in your money’s future value. If you were to pop your child’s piggy bank with £10,000, how much would it be worth in 20 years?
(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 10 Years |
|---|---|
| 11% | £3,522 |
| 10% | £3,855 |
| 9% | £4,224 |
| 8% | £4,632 |
| 7% | £5,083 |
| 6% | £5,584 |
| 5% | £6,139 |
| 4% | £6,756 |
| 3% | £7,441 |
| 2% | £8,203 |
| 1% | £9,053 |
| 0% | £10,000 |
This table assumes that inflation is constant over the 10-year period, applied annually and compounded over time. No interest is 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.
Of course, we all know inflation doesn’t stay the same over a long period – but you get the drift. Inflation erodes the buying power of your savings and investments unless the return is at least equal to the prevailing rate of inflation.
So what’s the answer?
There are 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, attitude to risk and timescale until you will access the money.
Whatever you decide, don’t leave yourself in a position where you’re unable to sustain your lifestyle by contributing an unaffordable sum towards your children’s or grandchildren’s future financial well-being.
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 savings or investment option do you use to help manage the cost of bringing up your children and/or grandchildren? Let us know by adding a comment below.
References:
1 https://www.thetimes.co.uk/money-mentor/article/starting-family-baby-costs/
2 https://www.savethestudent.org/student-finance/university-study-cost.html
3 https://www.schoolguide.co.uk/blog/how-much-does-private-school-cost
4 https://blog.moneyfarm.com/en/financial-planning/the-real-cost-of-raising-a-child-in-2023/