Hello everyone, Poppy here again. I’m no musician but I do know how to get all my notes in order for a melodic financial plan. In this piece I will look at how to play things right when planning for the future of your children and giving them the best start in life. Now that’s music to the ears.
The chances are that if you have children, you have already thought about how you can build a nest egg for them, to help with the expenses they will meet in later life. Expenses such as the costs of a university education or buying their first home.
Fortunately there are a number of options when it comes to investing on behalf of your children, although not as many notes as in a minor piano key. But remember they will become absolutely entitled to all the money you have invested for them when they are eighteen, so you also need to spend some time instilling financial discipline so they don’t blow it all in one go.
Here are some of the notes you can play with to help orchestrate things.
Junior ISA — the perfect pitch
You can invest up to £9,000 per tax year into each Child’s Junior ISA either into cash or stocks and shares. That’s a maximum 18 lots of £9,000 before they reach 18 which if we assume invested into stocks and shares and attracting a return of 5% p/a net of charges will generate a lump sum in the region of £250,000. Being an ISA all income and capital gains are free of tax.
Junior Pension — a long fruitful melody
You can contribute up to £3,600 per annum to a pension plan for each child. In fact you actually contribute £2,880 per annum and the pension provider claims the balance back from HMRC and adds it to the pension. This is very long term planning however as the pension is not available until age 55 at which stage under current rules up to 25% can be taken as a lump sum.
Gifts from parents and grandparents — make sure you get the notes in the right order
Children are entitled to their own tax free personal allowance of £12,500 and capital gains tax exemption of £12,300 which can be used against income and gains arising from assets held outside of the tax free zone of ISAs and pensions.
Gifts from grandparents are relatively tax efficient although consideration should always be given to the inheritance tax that will be due on the gift if the grandparent dies within 7 years of making the gift. Special insurance known as gift inter vivos insurance can be taken to cover this risk. Once the gift is invested in the name of the child then any income and gains arising is taxable on them and the above mentioned allowances are available to reduce any tax liability.
However, without wishing to get too involved in the complexities of taxation, there are rules that make it less efficient for parents to give investments directly to their children as any income over £100 derived from such a gift is taxable on the parent unit the child reaches 18 — or £200 per and if the gift is from both parents. Low income yielding investments are often the answer here with the target to keep the income below £100/ £200 per tax year.
The perils of direct gifts — playing the wrong note
Do you feel comfortable investing for your child so that when they reach age 18 they have a significant amount of capital available to them to do what they like with? What if they blow it all on enjoying themselves or marry young and divorce with half of those hard earned savings then gong to an ex-husband or ex-wife. Many parents would answer no to this question.
Junior ISAs have to be held directly by the child in any case but pensions cannot cannot be accessed until 55 in any event so are not really a problem. A bare or absolute trust is often used as a legal arrangement for parents to hold an asset on behalf of a minor but this does not confer ay legal rights on the parent once their child reaches 18 i.e the assets still transfer to the child outright.
It may be worth considering a discretionary trust where the trustees hold the money on behalf of the children or grandchildren who are the beneficiaries. In this way distributions of income are only made when the trustees see fit and this can therefore provide a lot of protection against a chid inheriting significant sums at 18. The trust pays tax at up to 45% on income but any income distributed to an over 18 year old child belongs to them for tax purposes and if they are non taxpayers or lower rate taxpayers then a refund will be due.
Past Performance is not a reliable indicator of future returns. When investing, the value of your investment may rise or fall and there are no guarantees you will get back all the capital you have invested.