Jess Wooler

Understanding Your Final Salary Income: What Income Will It Provide?

If you have a Final Salary pension, retirement planning can seem more straightforward. However, there are still important decisions that need to be made and it’s crucial that you understand the income it will provide. Whether retirement is just around the corner or some years away, reviewing your pension arrangements can provide confidence.

First, what is a Final Salary pension?

Final Salary pensions, also known as Defined Benefit pensions, are often referred to as ‘gold plated’. This is because your income in retirement is defined, protected and the benefits are typically competitive when compared to the alternative.

With the alternative pension scheme, a Defined Contribution pension, employees and employers make contributions, which benefit from tax relief and is invested. At retirement, pension savers have a lump sum of pension saving that will be dictated by how much they’ve contributed and investment performance. At retirement, they will have to decide how to access the pension and ensure it lasts for the rest of their lives.

In contrast, with a Final Salary pension, the pension scheme takes responsibility for how investments perform, which don’t have an impact on your retirement income. Instead, future pension income is defined from the outset. This is usually linked to how many years you’ve been a member of the scheme and either your final or average salary. At retirement, a Final Salary pension will pay out a regular income for the rest of your life.

Among the benefits of a Final Salary pension are:

• You don’t take responsibility for investments: You don’t need to decide where to place your pension contributions, this is in the hands of the pension scheme trustees. The performance of investments won’t affect your retirement income.
• It provides an income for life: Life expectancy can make planning for retirement challenging, as you don’t know how long pension savings need to last for. With a Final Salary pension, your income is guaranteed for life, taking away this element of uncertainty.
• The income is usually linked to inflation: In addition to a lifelong income, Final Salary pensions are usually linked to inflation. This means your income will rise in line with the cost of living, preserving your spending power in real terms.
• Many Final Salary pensions come with additional benefits: Your Final Salary pension may offer auxiliary benefits that provide peace of mind, such as a pension for your spouse, civil partner or children if something were to happen to you.

As a result, Final Salary pensions can be incredibly valuable for providing certainty and security in retirement.

Calculating your retirement income

The good news is that understanding the income you can expect to receive when you retire is usually straightforward.

How the income delivered from a Final Salary pension is calculated varies between scheme. .However, this will already be defined. If you can’t find the paperwork detailing this, contact your pension scheme. There will typically be three factors used to define your Final Salary income:

• How long you’ve been a member of the scheme
• Your final salary or a career average
• The accrual rate, this is the fraction of your salary that’s multiplied by the years you’ve been a member of the scheme.

Let’s say you earned £60,000 at retirement and it was your final salary that was taken into consideration. You worked at the company for 40 years and the accrual rate was 1/60. Your income in retirement would be £40,000 annually using the below formula.

Years as a member (40) x accrual rate (1/60) x salary (£50,000)

You should receive an annual statement from your pension scheme, which will include providing a value of your pension at retirement.

Creating flexibility with a Final Salary pension

A Final Salary pension can provide you with security throughout retirement. Yet, you may still want a flexible income to meet your retirement goals. This may be because you plan to spend more in early retirement or at other points. For example, you may have mortgage debt remaining, plan to travel or want to financially support loved ones.

There are ways that you can achieve the best of both worlds.

Many Final Salary pension schemes will allow you to take a one-off lump sum from your pension to kick-start retirement. This will reduce your income during retirement but does provide the capital for flexibility if needed.

Other options include using a Defined Contribution pension to fund a one-off expense if you have one and using your other assets, such as investments, to create a flexible income. It can be difficult to understand how your different assets fit together to help you reach retirement goals. This is an area we can help you with.

Transferring out of a Final Salary pension

If you have a Final Salary pension, you may be considering transferring out.

At retirement, you do have the option to give up the benefits of a Final Salary pension and receive a lump sum instead, which must be transferred to a Defined Contribution pension. There may be some benefits to doing this, such as providing greater income flexibility, but for most people transferring out isn’t the most appropriate option for them.

Receiving a lump sum can seem attractive. However, what you’re giving up, a guaranteed income for life is often more valuable. It’s important to weigh up your financial security and retirement goals before making a decision. If your Final Salary pension is worth more than £30,000, you must take regulated financial advice first.

Please contact us to discuss your Final Salary pension and what it means for your retirement lifestyle. Usually, there are ways to create a flexible income stream that will suit your goals whilst retaining the security one offers.

Please note: Transferring out of a Defined Benefit pension is not in the interest of the majority of people.

by Jess Wooler

What to do if you think you'll never retire

More people are paying into a pension than ever before. Yet, millions are still worried they'll never be able to retire. If you have concerns about the retirement lifestyle you will be able to afford, there are often steps you can take to improve this.

First, the good news: the number of people saving enough for retirement has hit its highest ever level, according to Scottish Widows. Almost three in five Brits are deemed to be putting enough aside for retirement, calculated at 12% of an individual's income. However, a worrying number expect they'll never be able to afford to give up work. Around a fifth of people believe they won't be financially secure enough to retire, equating to eight million individuals.

With fewer Defined Benefit (DB) schemes available, which offer a guaranteed income for life, individuals need to take more responsibility for their retirement finances. But the research indicates a large portion of the population don't have confidence in the steps they're taking.

Peter Glancy, Head of Policy at Scottish Widows, said: While the past 15 years alone have proved that things have been changed for the better, auto-enrolment alone won't avert a pension crisis in the UK. Government and industry need to take the next step together and also stop pretending the long-term savings challenge can be solved in isolation.

6 things to do if you're worried about pension savings

In recent years, the responsibility for creating a retirement income has shifted to individuals. The number of Defined Benefit (DB) pensions schemes has been falling. Also, Pension Freedoms mean retirees are now often responsible for how and when they access pension savings. As a result, it's natural to have some concerns about how your retirement provisions will provide for you.

If you're worried you won't be able to afford retirement or are unsure of the lifestyle you'll be able to enjoy, these six steps may help.

1. Assess your current savings

Whilst the Sottish Widows research highlights millions are worried about retirement, it doesn't state how much these people have put away. It may be that some are in a better position than they believe, particularly when looking at the long term.

The first thing to do is look at the amount you have already saved. The majority of workers will have several pensions due to switching jobs; getting a current value for them all is important. This will give you a figure to assess whether or not you're on track. Remember, most pensions are invested, and the value will hopefully grow between now and when you hope to retire. Providers will give you a projected value at traditional retirement age, however, this cannot be guaranteed.

2. Check contributions

Next, how much are you contributing to your pension? If you've been auto-enrolled into a pension by your employer, the minimum you contribute is currently 5% of qualifying earnings. However, you can choose to increase this. The end goal for pension savings can seem daunting, but it's worth remembering your employer will also be contributing at least 3% and you'll benefit from tax relief. These two incentives can significantly boost the amount you're putting away.

With a baseline for how much you're already putting away, you may want to consider increasing contributions. Even a small rise in how much you put away each month can have a big impact. When saving for life after work, a pension is often the most efficient way to save. Some employers will also increase their contributions in line with yours.

3. Don't forget the State Pension

It's not just your Personal and Workplace Pensions that will provide an income in retirement. For many, the State Pension will be the foundation. Once you've factored in how much you can expect to receive from the State Pension, the amount you need to take responsibility for can seem far less challenging.

The State Pension alone won't usually provide you with enough to secure the retirement lifestyle you want. But it does provide a level of security and maybe enough to cover essential outgoings. How much you'll receive will depend on your National Insurance record. To qualify for the full amount, paying out £8,767.20 annually in 2019/20, you'd need to have 35 qualifying years on your National Insurance record. You can check how much your State Pension is likely to be here.

4. Calculate other sources of income

Whilst pensions are the most common way to create an income in retirement, they're not the only option. Other assets you've built up throughout your working life can also be used and may be important to your personal financial plan. Yet, when initially looking at how affordable retirement is, you may have missed these out.

Among the assets to consider are savings, investments and property. How these assets can be used in retirement will depend on your situation and goals, but it's important they're not overlooked. Even if you don't intend to use them in retirement, knowing you have assets to fall back on if necessary, can give you the confidence needed to approach this important milestone.

5. Consider the costs of retirement

If you think you can't afford to retire, what are you basing this on? If you're looking at your current expenditure, you may be overestimating how much you need. Most people find their necessary income falls in retirement as some significant costs decrease. You may, for instance, no longer have a mortgage to pay or save each month on travel costs once you're not commuting.

The cost of retirement is individual and is linked to your plans. Taking some time to figure out how much you need can help you identify if there is a shortfall or where adjustments can be made if needed. According to Which? research, the average retired household spends around £27,000 a year. This is made up of basic areas of expenditure (£17,800 annually) and some luxuries.

6. Speak to a financial adviser

We often find that people are in a better position than they think when they consider the above five factors. We're here to help you pull together the different sources of income that can be used in retirement and understand how they'll provide for you. Using cashflow modelling, we'll be able to demonstrate how your current provisions will last throughout retirement and how changes to your saving habits will have an effect in the short, medium and long term. If you're worried about financial security in retirement, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.

Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.

by Jess Wooler

Why it's important to revisit your financial plan

Once you've set out a financial plan, you might think all the hard work has been done. But keeping on top of the progress you're making and ensuring it's still suitable is essential for getting the most out of your assets.

When was the last time you revisited your financial plan? It's a task that you might be tempted to put off or believe there's no need to complete. Perhaps you have reviewed your finances, but how in-depth did you go? It should be considered just as important and worthwhile as the initial work you did when setting out a financial plan.

Think back just ten years ago, your lifestyle, priorities, wealth and aspirations have probably changed at least to some degree during that time. As a result, the financial plan you created a decade ago may no longer be what's right for you. Coming back to your financial plan is a key way of making sure you're still on track financially.

Why review your financial plan?

1. Reflect personal changes: As we've mentioned above, your own situation can change significantly. Perhaps you've celebrated a pay rise over the last few months, welcomed a new family member or have invested in a second home. These can have an impact on your finances now as well as the best way to save and invest. A regular, full financial review gives you a chance to build these life events into your plan. Even seemingly small changes in your personal life may mean there's a better route for reaching your goals.

2. Review your goals: This one links with personal changes. Whilst your life may be similar to last year in terms of work and family, you may find that your aspirations have changed significantly. Perhaps you've decided you'd like to retire from work in a few years, which may mean you should start increasing pension contributions or reducing investment risk, for example. Taking some time to think about what you want to achieve in life and the role money will play in helping you reach goals can ensure your financial plan is aligned to you.

3. Keep track of progress: Even if your goals remain the same, you should take steps to measure your progress. From saving to purchase your first home to making retirement plans. Despite efforts, even the best-laid plans can face bumps along the way, some of which may be outside of your control. Reviewing how you're progressing is crucial for ensuring reality and expectations are in line.

4. Highlight potential risk and opportunities: New opportunities and risk are always emerging. A financial review is a perfect time to take a look at these and respond where necessary. You should also take the time to review your current exposure to risk is still right for you. It's a factor that should be influenced by many different areas, from your goals to capacity for loss, which may also change over time.

5. Take regulatory changes into account: As well as changes to your life, you also need to consider regulatory changes. These can be hard to keep track of, as some will barely be mentioned in the press. From changes to Inheritance Tax thresholds to the Lifetime Allowance for pensions, keeping on top of regulations can be time-consuming. View your financial review as an opportunity to discuss what's changed and how it affects you with your financial adviser.

6. Consider long-term wealth projections: As part of your original financial plan, you may have projected how your wealth will change over the year through cashflow planning tools. This can provide an invaluable insight that you can base financial decisions on. However, the output is only as good as the information the tool has used to reach conclusions. As a result, the core data needs to be updated and reviewed frequently to continue getting the best out of it.

7. Have confidence in your plan: Finances can seem complex and a cause for concern. But you should have confidence in the decisions you make and the direction that you're heading in. Reviewing your finances can give you a greater sense of control and you know you're basing decisions on information that's up to date.

When should you review your financial plan?

With so many reasons for reviewing your financial plan, you may be wondering when and how often you should undertake the task. Ideally, we advise clients to thoroughly review their finances every year. This makes it far easier for you to keep on top of potential changes and ensure that your financial plan suits your current situation. On top of this, it's a good idea to review your finances following big life events too, from buying a home or getting married to celebrating retirement.

If you're ready to look over your financial plan, please contact us.

by Jess Wooler

Auto-enrolment increases, but many still won't be saving enough

Auto-enrolment has been hailed a success in getting workers to save for their retirement. However, as minimum contributions are set to rise, there are concerns more will opt out and figures highlight many still won't be saving enough to support them once they give up work.

While auto-enrolment may not be an issue affecting you, it's likely having an impact on the way your children or grandchildren are saving for retirement.

What is auto-enrolment?

Auto-enrolment means the majority of workers in full-time employment in the UK are automatically enrolled in a Workplace Pension, making at least minimum contributions. The initiative aimed to ensure more employees are actively saving for their retirement. With the number of Final Salary pensions offered to employees falling, the responsibility for saving for retirement has shifted to the individual.

Since launching in 2012, ten million UK workers have been auto-enrolled into a Workplace Pension. As a result, the policy has been considered a success. Minimum contribution levels have already increased once, and are now just weeks away from rising again for the tax year 2019/20. It'll mean those currently paying the minimum levels will see the amount being taken from their salary increase each month. There are some concerns that it may lead to more employees opting out of their pension, putting future financial security at risk.

However, even with minimum contributions increasing, it's projected that millions will still be undersaving. According to NOW: Pensions, around 12 million people relying on a Workplace Pension could find they face a shortfall when they reach retirement age. The figure is equivalent to 38% of the working age population.

While undersaving is an issue that affects those in low paying positions, it's also a concern for many others. The research indicates that 87% (10.4 million) of those identified as undersaving earn more than £25,000 annually. As a result, many graduates and other professionals could be on track for a retirement that's less financially comfortable than thought.

Encouraging loved ones to engage with their pension

If your children or grandchildren are thinking of opting out of their Workplace Pension or relying on the minimum contributions to provide a comfortable lifestyle, encouraging engagement with their savings can help. The sooner workers get to grips with their pension and understand what it means for retirement, the more likely they are to achieve their goals. So, how can you help?

Explain the benefits of increasing contributions: For younger generations paying off a mortgage or rent, increased pension contributions can seem like an expense they can't afford. However, once you look at the benefits, such as increased tax relief and compound investment returns, it can often be viewed as a prudent, long-term investment decision. It may mean they're slightly worse off financially now, but provide much larger gains for the future.

Encourage them to understand projections: When you look at the projected income from a pension it often has little meaning. Just a glance at the value a pension is expected to be worth at retirement doesn't demonstrate the level of income it will provide or how long it could last for. As a result, delving deeper is crucial for understanding if they're on track to meet retirement goals. Realising they could fall short of their desired lifestyle may give workers the push needed to start increasing contributions.

Look at other ways to fund retirement: While pensions are a tax-efficient way to save for retirement, it can be complemented by other savings or investments. If your loved ones are worried about increasing pension contributions as they'll be locked away until they approach retirement age, exploring alternatives may be the answer. Putting money into an ISA (Individual Savings Account) or creating an investment portfolio with a retirement goal could provide more flexibility and reassurance.

Suggest where to seek professional support: Working with a financial adviser can help put decisions related to a pension into perspective, as well as highlighting how to make the most of income and wealth. However, younger generations may believe they don't need professional support yet. Providing them with insights into how and why you use a financial adviser, along with recommendations, can improve their financial security over the short, medium and long term.

To discuss how your pension is on track to provide the retirement you want or to connect us with the next generation of your family planning for their later years, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace Pensions are regulated by The Pension Regulator.

by Jess Wooler

Should you stop pension contributions if you're approaching the Lifetime Allowance?

If you've been saving into a pension during your working life, you might be closer to the Lifetime Allowance than you think. Going over the threshold could mean facing tax charges on future income and, as a result, some are opting to leave their schemes. But is that the best option?

What is the Lifetime Allowance?

Currently set at £1.03 million, the Lifetime Allowance is the total amount you can save into a pension over your life. It can seem far-off, but when you consider we may pay into a pension over four decades, along with employer contributions, tax relief and potential investment returns, the value of your pension can be more than expected.

What happens if you exceed the Lifetime Allowance?

Legally you can exceed the Lifetime Allowance. But this means paying additional tax. If, when you start taking your pension, the value exceeds the Lifetime Allowance, the excess benefits will be subject to:

• 55% tax if the pension is taken as a lump sum
• 25% if withdrawn as an income

With this in mind, it's easy to see why some are choosing to retire early, reduce hours or opt out of a pension scheme entirely.

It's a trend that's particularly evident among high earners and those with Final Salary pension schemes, which typically offer greater benefits than alternatives. It's a penalty that's affecting doctors, but it's also an issue for other earners.

To calculate a Final Salary scheme in your Lifetime Allowance you must multiply the expected annual income by 20. If, on the other hand, you transfer out of the scheme, the Cash Equivalent Transfer value may be quite high and contribute towards a large proportion of your allowance.

Even if you're approaching the Lifetime Allowance, there are two key reasons to continue paying into your pension:

1. Employer contributions: If you leave your employer's pension scheme, they will stop paying in too. This could end up costing you money overall. While the tax implications may be less tax-efficient once you breach the Lifetime Allowance, it doesn't necessarily mean all the benefit is lost. Where your employer is contributing at high levels, it may be the case that this offsets the additional tax you pay, and you still end up with more than you put in.

2. Auxiliary benefits: Before considering leaving your pension scheme, look at the additional benefits on offer. Some pensions offer auxiliary benefits that may be valuable to you; leaving the scheme typically means forfeiting these. One of the most common auxiliary benefits is a pension for your spouse, civil partner or dependents. It provides financial security for your loved ones should you pass away first, it will usually pay out a percentage of your pension or salary.

While avoiding paying unnecessary tax on your savings makes sense, it needs a balanced approach. Weighing up how the decision can impact financial security, as well as your family's, now and when you reach retirement is important. In some cases, paying more tax could prove beneficial when you look at the bigger picture.

Options if you leave your pension scheme

While it's not the right option for all, for some leaving a pension scheme may make sense. If you progress this option, it's crucial to have a plan for the future. There are other tax-efficient ways to save for your future, such as Cash and Stocks and Shares ISAs (Individual Savings Account).

If you'd like to discuss retirement provisions and tax liabilities and their impact on your wealth, please contact us. We can help you understand if leaving your employer's pension scheme is the right thing to do in your situation.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

by Jess Wooler

Tips for planning for your future if you're part of the 'Sandwich Generation'

If you feel as though your finances are under pressure as you support both children and elderly parents, you're likely to be part of the 'Sandwich Generation'. Research has found that many of those aged between 40 and 60 are struggling with financial responsibilities.

Despite being caught in the middle of two types of dependents, many in the Sandwich Generation aren't financially prepared, according to a survey from LV=.

Among those dubbed the Sandwich Generation:

• 52% are worried about the consequences of a serious illness affecting themselves or their partner
• 30% are worried about the prospect of themselves or their partner dying and leaving the family without an income
• 54% want to save but can't afford to
• 37% have less than £125 disposable income each month
• 46% cite children as a constant source of unexpected expenses

While working to support families, the Sandwich Generation is neglecting their own long-term financial security. On average those within this group have a pension valued at £60,000 that they expect to last 20 years. It's an amount that is likely to result in an income of less than £260 a month, according to LV=. Even when the full State Pension is added, assuming you qualify, at £164.35 per week, many are facing a retirement struggling financially.

Justin Harper, Head of Marketing at LV=, said: It's clear this group feel they are being pulled in many directions, with pressures to care for older relatives and ongoing responsibilities for their children. The Sandwich Generation have huge financial obligations and with the rising cost of living, are worrying about what could be around the corner. Spreading finances too thinly and dwelling on their worries, means the impact of having little to no plans in place, could expose them to a real income shock.

Five tips if you're part of the Sandwich Generation

With different priorities pulling at your finances, it can be challenging to manage daily expenses alongside building security. These five tips can help get you on the right track:

1. Create a realistic budget

Setting out a monthly budget that covers everything, from utility bills to savings, can help you find the areas to cut back on.

You probably already have some sort of budget, even if it's just in your head. But writing it down and keeping track of what you're spending makes it far easier to stick to. If you find you're regularly going over what you set aside to spend or undersaving, you may need to revisit what's realistic.

Of course, there are times when unexpected bills crop up. Leaving a portion of your income to act as a buffer in these events can help.

2. Build up an emergency fund

The Money Advice Service (MAS) recommends having a safety net of at least three months' salary to fall back on. However, 57% of the Sandwich Generation don't have this amount, the research found. As a result, 34% don't feel they could handle a personal financial crisis.

If you're among those that don't have an emergency fund, now is the time to build one up. Looking at the end figure can seem daunting. Instead, focus on putting away a small portion of your wage every month as soon as you're paid. Breaking it down into smaller chunks can make creating a financial safety net more manageable.

When your finances are really under pressure, even putting away small sums can seem impossible. But making it part of your monthly budget can mean you feel far less apprehensive about the future.

3. Consider protection

If you're one of those that are worried about how your family would cope should something happen to your income, some form of protection can give you peace of mind.

Income Protection that will pay out monthly in the event of illness or injury, for example, can ensure both you and your loved ones have a safeguard in place. There are other options too, such as Critical Illness Cover and Life Insurance. Which one is right for you will depend on your situation and what you're concerned about.

When your finances are already stretched, it can seem like an unnecessary expense. However, consider the financial consequences of not having any cover should illness, injury or death strike.

4. Don't neglect your own financial future

With a focus on providing for ageing relatives and children, the research suggests the Sandwich Generation are doing so at their own expense. Don't forget to take steps to secure your own financial future too.

One of the key steps to take here is to save into a pension. If you're working full-time, you've probably been automatically enrolled into a Workplace Pension in the last couple of years. While you can opt out of this, it's short-sighted.

5. Talk to a finance professional

There's a common misconception that financial advice is only for the wealthy. The truth is that it can help you to get the most out of your money. Seeking the advice of a financial adviser or planner can help you balance the needs of today with those in the future.

By better understanding how your money choices will affect your financial security immediately and in the future, you'll be in a better position after speaking to a professional. Contact us today to get the process started.

by Jess Wooler

The cost of university: Parents expecting to pay £17,000

Going to university can be expensive. But not just for the student; parents are expecting to pay out thousands of pounds every year to help their child secure a degree.

Parents anticipate spending £5,721 each year their child is at university, according to research from Lloyds Bank. Over the course of an average three-year degree, it amounts to £17,165. With around half of young people choosing to pursue higher education, it's an expense many households in the UK could be facing.

Just 10 years ago, the figure would have been enough to cover tuition fees and leave some leftover, that's now not the case. Current tuition fees are capped at £9,250. With accessible student loans covering tuition fees, many parents are focussed on the other costs associated with university.

The research found:

• Two-thirds of parents who anticipate sending their child to university expect to support them financially on some level
• Only 14% of parents do not anticipate helping their child financially while they study
• 65% of parents believe they will have to provide support with accommodation costs
• 64% will offer financial help with items essential for study
• 58% expect to pay some or all tuition fees
• 52% will help with travel to and from classes
• 23% are prepared to pay for luxuries

Robin Bullochs of Lloyds Bank said: The costs associated with going to university can mount up quickly, and often it's unexpected costs that rack up the bill making it essential to take some time to consider the many expenses that may arise and budget for how these will be afforded.

The findings suggest parents will face additional outgoings they may not have factored into their budget once teens head to university. Having a fund you've been saving into before they go to university can help spread the cost. For families that have more than one child aspiring to achieve a university education, it could be essential.

With this mind, how can you save for the cost of supporting your child through university?

Junior Individual Savings Account (ISA)

Like their adult counterparts, Junior ISAs offer a tax-efficient way to save.

Each tax year you can add up to £4,260 into a Junior ISA. The interest or return made from a Junior ISA is tax-free. Any money you add to an ISA will be locked away until your child turns 18; at this point, it will be converted into an adult ISA and fully accessible to them.

If you're considering opening a Junior ISA, you have two options: A Cash ISA or Stocks and Shares ISA. Which one is best for you will depend on your attitude to risk and how long you'll invest for.

Junior Cash ISA: If you choose a Cash ISA, the money you put in is safe and you will get a defined amount of interest. That being said, there is a risk that the money won't grow as quickly as inflation, meaning it loses value in real terms.

Junior Stocks and Shares ISA: A Stocks and Shares ISA offers you an opportunity to access potentially higher returns by investing. The return you receive will be dependent on the performance of the underlying investments. It is, of course, possible that the value may temporarily decrease at times.

Children's savings account

There is a range of children's savings accounts to choose from. Often, these types of accounts will offer you more flexibility, such as being able to make withdrawals. However, depending on the terms, this may come with a penalty, for example, losing the specified interest rate.

Children's savings accounts can offer competitive interest rates that will allow the money you deposit to keep pace with inflation in real terms.

Some accounts will specify you put in a certain amount each month or limit contributions. As a result, weighing up the pros and cons of each account is important before you make a decision.

Child Trust Fund

If your child was born between 2002 and 2010, they will have a Child Trust Fund.

The now defunct government scheme aimed to help parents build up a savings account for children. Each account benefited from an initial £250. Some children may have received more as an initial payment and benefited from a further boost when they turned seven.

If you didn't open a Child Trust Fund, the government will have automatically opened one in your child's name. It's estimated that 1.5 million Child Trust Funds are 'lost' or forgotten about. So, it's worth looking into this and you can track down 'lost' accounts here. Once they turn 18, your child will be able to withdraw any money in the account and spend it as they wish.

Even if you haven't added to the account since it was opened, it can provide a starting point to build future savings on. As the Child Trust Funds initiative has since been shelved, you can transfer the money into a Junior ISA account if you choose.

Bare Trust

A Bare Trust is the simplest form of trust. It's where a gift is held for the beneficiary, it can be opened by anyone and then managed directly. The child will be entitled to the money, and able to withdraw it, once they turn 18.

There are several benefits to using a Bare Trust:

• First, the trustee can withdraw money from the Trust before the beneficiary turns 18, so long as it's to benefit the child. It gives you a level of flexibility that some of the other options don't have. For example, you could take out money to pay for college or sixth form fees.
• You can also manage the Trust directly. If you'd like to make specific investments or have a clear risk profile, a Bare Trust might suit your needs.
• Finally, there's no contribution limit; you can add as much as you like to a Bare Trust.

As well as the options above, you may also want to consider saving or investing money in your own name. This is a good option if you don't want your child to have full control and access to the money when they turn 18. It allows you to retain some control over how it's spent and how quickly.

If you want tailored advice on saving for your child or grandchild, we're here to support you. Taking your personal circumstances into consideration, we can help you choose the savings vehicle that's best for you.

by Jess Wooler

Could you help your children have a £1 million pension?

Using your gifting allowance effectively could mean you're able to leave your children or grandchildren a significant, tax-free gift behind in the form of a £1 million pension. Discover the steps you can take to reach this goal.

With auto-enrolment now in full force, the topic of saving for retirement has never been more relevant for younger generations. Research has suggested that most people aren't saving enough to achieve the lifestyle they want when they retire, indicating that more than a few future retirees will experience a shortfall, with past research from Hymans indicating a UK-wide shortfall of £5 trillion.

Whether you're a parent or grandparent, using gifting rules and tax efficient saving schemes could help you secure a child's future once they finish work or help get them on to the property ladder.

Previous research from Aegon indicated that 12 million people weren't saving enough to provide the income they require in retirement, with many incorrectly estimating the sums required to generate an income in retirement. The firm's analysis found that people on average earnings required a pension of £301,500 to maintain their lifestyle in retirement. Future retirees that are planning to use their years after work to travel and explore new hobbies without the restrictions of work will need significantly more.

With the rising cost of living, the challenges of getting on the property ladder and student debt increasing, helping children and grandchildren experience long-term financial security is becoming a common goal. The good news is that with a bit of forward planning it is possible to help your child or grandchild have the means to purchase a property in adulthood or even secure them a £1 million pension.

Rather than leaving your loved ones an inheritance, which may be subject to Inheritance Tax (IHT), you can use your money to help children build wealth while you're alive. It gives you an opportunity to firstly leave a larger legacy and to see your loved ones enjoy your generosity while you're still with them. With IHT reaching record levels last year, it's an option that's worth exploring.

Laura Suter, Personal Finance Analyst at investment platform AJ Bell, said: Parents or, potentially more realistically, grandparents can save on their inheritance tax bill and pass substantial sums to their children or grandchildren by making use of lucrative annual gifting allowances.

Figures released recently showed record levels of inheritance tax were paid last year, topping £5.2 billion. As more and more people are caught in the net of inheritance tax, it's more important than ever to make use of the allowances the Government hands you.

Using your gifting allowance

If you're worried about your children and grandchildren facing a significant IHT bill when you pass away, using your gifting allowance wisely can help to put your mind at ease. It's a way for you to pass on substantial sums over time without being subject to IHT.

To begin with, your annual gifting allowance is £3,000, this is money that will always be free from IHT. Should you decide to gift over £3,000 annually, there's the seven-year rule to think about. Should you die within seven years of a monetary gift being received that went beyond the gifting allowance, IHT may need to be paid.

By making full use of the annual £3,000 gifting allowance to help children, AJ Bell has calculated that families could save £43,000 in IHT if both parents and grandparents use it to build wealth over an 18-year period.

What to do with the gifted money

According to the research from AJ Bell, if both parents and grandparents maximise their gifting allowance from the first year of a child's life right through to reaching 18, the child will have accumulated £108,000 before they even leave compulsory education. With this in mind, how should you hold this money to ensure it benefits them in the long-term?

There are two potential options to consider, a pension and a Junior ISA, depending on how you want the money to be used and accessed.

Junior pension

You can start saving for your child's future right away with a pension.

For children, contributions to a pension benefit from 20% tax relief up to a maximum annual contribution of £3,600. That means if you contribute £2,880 on behalf of your child or grandchild, they will receive a tax relief of £720 (which is effectively 'free money'). AJ Bell's figures show you end up with a sum of £64,800 over an 18-year span. Assuming returns of 5% after charges, your child's pension will have reached £105,197 before they start their working life.

Without any further contributions, AJ Bell's figures indicate it will take 46 years for the pension to reach the £1 million milestone, allowing your child to comfortably retire and enjoy their later years by the age of 64.

Of course, there is no guarantee that this will be the actual amount that will be in your child's pension. A range of different factors, including rate of return and charges levied, have an impact and need to be considered.

Laura Suter comments: Given the growing savings gap in the UK, a £1 million pension pot is an amazing thing to create for a child and gives them one less thing to worry about as they struggle with student debt.

Of course, with the right financial knowledge instilled, the child's pension should continue to grow, for example, through workplace contributions. However, one area to be mindful of is ensuring that they don't end up breaching their Lifetime Allowance on their pension. This is currently set at £1.03 million but it is a figure that will rise alongside the cost of living as it is index linked.

Junior ISA

If you want to ensure your child or grandchild has a significant financial buffer before they reach the age of 18 but don't want the restrictions of a pension, a Junior ISA could prove to be the better option for you. Rather than having to wait until retirement age, the child would be able to access the money once they reach adulthood, making it an excellent option for providing support to get on the housing ladder.

Junior ISAs can be used from birth up to the age of 18, with an annual contribution limit of £4,260. If you only used your £3,000 gifting allowance to make yearly deposits in an account that benefitted from 5% interest rates, the sum would total £87,664, which would be tax free to withdraw. Taken out at 18, the Junior ISA would provide a sizeable deposit for a home. Alternatively, if the account was left accumulating interest with no further deposits for a further decade, it would reach £144,383, AJ Bell's calculations show.

Get in touch with us to discuss the most tax efficient way to gift and maximise your legacy with securing your children or grandchildren's future in mind.

by Jess Wooler