How to plan for your family’s financial future

Investing for the future is one of the most significant financial undertakings in life. When that future involves the security and goals of your family, the importance is magnified. From funding your child’s education to laying the groundwork for their first home, a robust investment strategy is the bedrock of long-term family prosperity.

This article provides essential insights into help build that strategy. We will move from the principles of goal-setting and risk management to the specific investment vehicles you can use to turn your investment and monetary goals into reality.

Setting your strategy

The path to smart investing doesn’t start with picking a product; it starts with a plan. A robust financial strategy is started with three key questions: what are your goals, what is your timeframe, and what is your personal tolerance for risk.

Identify your goals

The first step is to define what you are saving for. These are the most common longer-term family saving goals.

• University education: for a newborn, this is an 18-year goal.
• Private school fees: this could be a shorter-term, rolling goal starting in 5-10 years.
• A house deposit for your children: a long-term goal that might be 20-25 years away.
• A larger family home: a medium-term goal for your own family’s growth.

Defining your goals early provides motivation and, crucially, dictates the timeframe you have to work with.

Establish your timeframe

Once your goal is set, the timeframe becomes clear. This is one of the most important factors in determining your investment approach. Generally speaking, a longer timeframe, such as saving for a newborn’s university education, allows you to weather short-term market fluctuations. This means a portfolio with a higher allocation to equities (stocks and shares) may be appropriate. Although they involve risk and past performance is no guarantee of future results, these have historically offered greater long-term growth potential.

Conversely, for shorter-term goals (under five years), a more cautious approach may be warranted. You have less time to recover from market downturns, so a portfolio with a lower equity component and more in bonds or cash may be more suitable.

At Moneyfarm we are able to assess your risk profile and investment objectives through an all-encompassing questionnaire. This allows us to recommend the portfolio we believe best suits your personal circumstances and goals, taking into account your timeframe and risk tolerance. In practice, this means suggesting one of our ready-made portfolios, where the mix of equities, bonds and cash is designed to match your needs.

Understand your risk profile

Your investments should match not just your ability to take risk, but also your comfort with it. A longer time horizon can increase your capacity for risk, but only if you’re comfortable with the ups and downs along the way. For example, knowing you have 18 years to save can make market dips feel less alarming. This long-term perspective allows your investments to benefit from compounding, which can pay dividends over the long run. More information about the benefits of compounding can be found here.

Identifying the best investment wrapper(s) for your goal

Now that we’ve established your objectives and timeframe, the next step is to determine which investment wrapper best suits your goals and time horizon. There are a variety to choose from, all with different purposes and benefits.

Junior ISA

A Junior ISA (JISA) is a tax-free savings and investment account designed specifically for a child’s future. It’s a long-term account opened by a parent or guardian for a child under 18. You can choose between a Cash JISA or a Stocks & Shares JISA.

• Key benefits:
  • Tax-free growth: All capital gains and income are completely tax-free.
  • Generous allowance: You can contribute up to £9,000 per child per tax year.
  • Locked: Funds cannot be withdrawn until the child turns 18, ensuring the money is ring-fenced for their future.
• Key considerations: Once the child turns 18, the JISA automatically converts into an adult ISA, and they gain full control of the money. It is legally theirs to use as they see fit.
• Best for: Long-term goals for your children, such as university fees or a first home deposit.

ISA

An Individual Savings Account (ISA) is the adult equivalent of a JISA and is the go to tax-efficient investment wrapper to start saving for personal goals. It’s a tax-free account with an annual contribution limit of £20,000 per tax year. Any growth within the wrapper or money withdrawn is completely tax free.

• Key benefits:
  • Tax-free: No tax on any capital gains or income.
  • Flexibility: Funds can be withdrawn at any time without penalty (though some fixed-term Cash ISAs may have restrictions), making them suitable for a vast range of goals.
  • Versatility: Can be used for defined objectives (like a new car or home extension) or simply as a flexible way to build wealth for an undefined future.
• Key considerations: The £20,000 allowance is annual and does not roll over, so it is crucial to ensure it is utilised every tax year.
• Best for: Almost any medium-to long-term objective for yourself, from saving for a holiday to supplementing your retirement fund. It’s an excellent, flexible tool for undefined goals.

GIA

A General Investment Account (GIA) is for those who have already maximized their ISA allowance but wish to invest more. It’s a standard investment account with no contribution limits.

• Key benefits:
  • Unlimited contributions: Invest as much as you like.
  • Total flexibility: No restrictions on when you can access your funds.
• Key considerations: This wrapper is not tax-free. You are liable for Capital Gains Tax (CGT) on profits above the annual exempt amount (£3,000 for the 2024/25 tax year) and tax on dividends and income received. A common strategy is to sell investments in a GIA and move the proceeds into an ISA at the start of each new tax year, a process known as Bed and ISA, to shelter future gains from tax.
• Best for: Individuals with surplus funds after fully utilising their ISA allowance.

Pension

While primarily for retirement, a pension is one of the most tax-efficient investment wrappers available and a crucial part of ensuring long-term family security. The most common types are workplace pensions and Self-Invested Personal Pensions (SIPPs).

• Key benefits:
  • Tax relief on contributions: When you pay into your pension, you receive tax relief from the government. For a basic-rate taxpayer, a £80 contribution is topped up to £100.
  • Tax-free growth: Your investments grow free from UK capital gains or income tax.
  • Tax-free lump sum: You can typically take 25% of your pension pot as a tax-free lump sum from age 55 (rising to 57 in 2028).
• Key considerations: Your money is locked away until you reach pension access age. This makes it unsuitable for short or medium-term goals.
• Best for: Its intended purpose, retirement. A secure retirement for yourself is a foundational gift to your family, reducing future financial pressures on your children. However, if any goal you have goes past your retirement age, then the Pension could be a suitable wrapper to consider to meet this goal. The contribution limit is the lower of your relevant earnings for a tax year or £60k, which provides a greater allowance than the ISA limit.

Bringing it all together

The most effective approach often involves using a combination of these accounts simultaneously.

• For the kids’ future: Start a Stocks & Shares JISA early to maximise the long-term growth potential for education or a house deposit.
• For your medium-term goals: Use a Stocks & Shares ISA for flexibility. This can be an emergency fund, a savings pot for school fees, or a fund to help your children later in life.
• For your long-term security: Maximise your pension contributions to take full advantage of tax relief and compound growth, securing your own retirement and, by extension, your family’s financial stability.
• For additional investing: Once your ISA is full, a GIA allows you to continue putting your capital to work.

By planning ahead, setting clear goals, and using the right combination of investment tools, you can build a secure and prosperous financial future for your entire family.

As always, if you wish to discuss any one of our products or services, please reach out to our investment consultant team.