The main thing to consider is when the money will most benefit your children's lives.
What’s the best way to set your children up financially?
It’s a big question for any parent, and there is no shortage of options.
One that’s been getting a bit of attention lately is a Junior Self Invested Personal Pension (SIPP), taking the long-term approach by opening a pension for them when they are still young and allowing it to grow over the coming decades.
But I’m not sure it’s quite the appealing move it may seem to be.
Getting the most bang for your buck
It's not hard to understand why parents would want save into a pension on a child’s behalf.
From a purely financial perspective, it’s perhaps going to deliver the best bang for your buck ‒ the money will be invested for such a long period that even modest sums have the potential to turn into significant amounts thanks to compound interest.
As we have explained previously on loveMONEY, the first pounds you save work the hardest.
What’s more, we know that it is becoming ever tougher for younger people to put money aside for their retirements.
There’s no shortage of demands on our money, particularly if you someday dream of owning your own home, meaning that plenty of people view pensions as a problem for another day.
If you start saving into a pension on your child’s behalf then at least you know that when the time comes to retire they will have some sort of personal savings to call on, besides whatever the State Pension looks like at that point.
That way they can prioritise those more short-term demands on their money, like getting a deposit together.
I need the money now
That said, I’m not convinced it’s the best move.
Yes, it is the approach that will likely see the biggest return on the money set aside today, but in the bigger picture, it may be that the child is worse off as a result.
Let’s take that deposit example again.
If your child is desperate to get their own place, to spread their wings and set up a home for their own family, then it will be far more useful to them to have that money somewhere they can access rather than locked away in a pension they can’t touch for decades.
The knowledge that compound interest will mean they have a higher income in retirement will be cold comfort if they are still living with their parents into their 40s because they can’t afford to move out and get their own place.
So while thinking long term is sensible, there’s clearly a balancing act to be found.
Helping your child financially in the short term is important too, if you have the finances to do so.
Why wait until I die?
There’s a similar issue here with inheritance.
One of the reasons Inheritance Tax is such an emotive subject is that people want to be able to leave something behind for their loved ones, to give them a financial boost after they have gone.
But with people living longer, there is an argument that waiting until you die to pass that cash on is leaving it too late.
Handing money over to your loved ones earlier not only has the potential to give them a financial boost when they need it most, but you also get to see them enjoy doing so.
You get to be there when they pick up the keys to that first house, or set up their own business, rather than it all happening after you’ve passed away.
Throw in the fact that there are tax benefits too, since you can make use of the annual gifting allowance to reduce the size of your estate anyway, and it becomes a smart thing to do financially for you as well.
Even for those who don’t have the cash to hand, the push to hand over the inheritance while you’re still alive has been a factor in the number of people opting for equity release plans.
That way they can unlock some of the money held up in their home, without having to sell up.
Saving for your children
Any parent, or grandparent for that matter, wants to take measures to ensure that their children are in a decent spot financially. But there is a real balance to be found if you want to do it effectively.
Whether to save into a pension for your child is a great example of this dilemma, but even savings accounts for children can highlight the problem too.
Take Junior ISAs.
Both of my children have them ‒ it’s where we put the money they get from loved ones for birthdays and special occasions.
There are some potential downsides to them though.
You can’t make any withdrawals for example, meaning they aren’t great for teaching your children about money management, a keen issue we have experienced as my eldest has become a teenager and wanted a little independence over how they use their money.
There’s also the fact that the child takes over responsibility for how that money can be used once they reach 18.
It’s one thing to have put some money aside to help my sons with a deposit on a house or to buy a first car, but I have no say over how they use the cash we’ve saved ‒ they can blow the lot on Pokemon cards if they want, and I can’t do anything about it.
Finding the right balance
There is no ‘right’ way to save money for your children.
What works for some will not be a great option for others.
Ultimately it’s a matter of trying to find the right balance for you and your family.
Spreading the money across a few different options, from pensions to Junior ISAs to your own ‘secret’ savings stash for your kids may involve more work on your part, but it could be the best way to give your loved ones a bit of financial help over both the short and long-term.