- Newborns need £500k for future home, £1m in London
- Saving early with £85/month can build £75k by 31
- Consider Junior ISAs, stocks for inflation-beating growth
According to research conducted by real estate agent Lomond, a baby born today would require more than £500,000 to purchase their first property when they reach the age of 31, which is the mean age of first-time buyers. This is an increase from first-time purchasers’ present mean house price, which stands at £237,655.
It was determined that buyers in London would require £1 million. The data is predicated on the historical development of house prices over the previous three-and-a-half decades and assumes that this trend will continue for the following thirty-one years.
If these projections are accurate, a newborn born today would need an estimated £75,000 for a 15% down payment and £95,000 annually in income, approximately 4.5 times their average annual income, to qualify for a mortgage.
Considering inflation, this represents a significant increase compared to the prevailing average annual full-time wage of £34,963.
The trajectory of house prices in the coming year may not necessarily mirror prior years. However, it is probable that in the future, first-time purchasers will require substantial financial resources to ascend the property ladder. Even now, many may find it challengingeasier to accomplish this with the assistance of family members.
For most families, securing a substantial lump sum to assist with a down payment on a first property is daunting. However, beginning to save early is more feasible. Assuming a 5% annual return and reinvesting the interest, a child or descendant born today could accumulate £75,000 by the time they reach the age of 31 by setting aside £85 per month.
It’s easy to place arranging your child’s savings at the bottom of your list amidst the daily chaos of parenting, according to Laura Suter, director of personal finance at AJ Bell. However, setting aside a small amount of money each month can give them a substantial sum when they reach adulthood. Consequently, where ought one to preserve their funds?
One potential course of action is establishing a simple savings account for children. You may make lump-sum or monthly contributions, and upon reaching 18, you will be granted authority over the account. At 5.25 per cent interest, the account Coventry Building Society offers is the finest on the market.
Despite this, there are several issues with this option. Firstly, for tax purposes, any interest earned on the account of more than £100 per year will be considered yours if you are the child’s parent.
It will be incorporated into your Personal Savings Allowance, subject to income taxation if it surpasses £1,000 annually for basic-rate taxpayers (£500 for higher-rate earners).
To circumvent this, the funds can be invested in a Junior Isa. Here, all savings interest and investment returns are exempt from taxation.
Additionally, Coventry Building Society offers the top Junior Isa a salary of 4.95 per cent.
Junior Isas are subject to parental or guardian supervision until the minor reaches 18. They would then own the funds and have the authority to decide how to manage or spend them. Next, we will discuss growth. Long is the time allotment if you are saving on behalf of a baby or young child with the expectation that the funds will assist them in purchasing their first property.
The deterioration of currency into investments, as opposed to holding cash, will result in greater returns due to inflation.
“A junior ISSA for stocks and shares is generally the best option,” advises senior personal finance analyst at Interactive Investor Myron Jobson. “The potential for generating returns that surpass inflation is greater than the rate of interest earned on cash savings.”
“Because the majority of Junior Isas are inherently long-term and cannot be accessed until the child reaches the age of 18, there is sufficient time for the inevitable short-term fluctuations in the stock market to be resolved.” If you are concerned that your adolescent child may gain access to the funds, as they might with a Junior Isa, consider opening an account in your name. This will allow you to determine when to give them the money.
Jobson advises, “Those who do not fully utilise their adult Isa allowance of £20,000 per year may find it beneficial to ringfence funds within that amount as a means of saving for their child.” Bear in mind that maintaining the savings in one’s name may potentially give rise to complications regarding inheritance tax in subsequent periods.
Financial endowments over the yearly gifting allowance of £3,000 would continue to be regarded as bequests for inheritance tax intentions in the event of your demise within seven years of the donation.
“Unlock your financial potential with free Webull shares in the UK.”
An allowance is provided to each individual, enabling them to bequeath gifts subject to inheritance tax for a maximum of £325,000 (or £650,000 for couples).
Additionally, each individual is granted an additional allowance of £175,000, which serves as a tax-free bequest vehicle for a family residence valued at a maximum of £1 million. Any amount over these allowances will presumably be subject to a 40% inheritance tax.
There are several methods to reduce the cost of giving cash as a gift during one’s lifetime.
One strategy to mitigate the potential liability for inheritance tax in the future is to establish a trust for one’s child or grandchild with the savings.
Then, you can specify when they can access the funds; if they intend to use the funds to purchase their first property, 30 days may be an appropriate amount.
As soon as the trust is established, the funds become the child’s, so the seven-year countdown could commence sooner rather than years from now. This would increase your chances of outliving the inheritance tax threat on the trust’s principal.
Furthermore, you would have bestowed the funds as a gift when they were still relatively modest before the money’s growth, rendering it less probable to influence your estate regarding inheritance tax.
