Ian Thomas, Pilot Fiancial Planning
What's The Best Way to Save For Your Children?
Many parents set up a deposit account for their children which is a great way to start to teach them the basics of finance - but as a strategy to build a nest egg for their future, it has some serious limitations.
The first is that any interest over £100 earned on money given to children under the age of 18 by a parent will be taxed as if it were the parent’s own income (note: this does not apply to grandparents). This is to ensure that parents don’t use their offspring as convenient tax-avoidance vehicles!
Another obvious drawback is that interest rates are currently at an all-time low, but even in more ‘normal’ times, cash savings typically struggle to keep pace with inflation over the longer-term, meaning that although the value of your savings will steadily rise over time, what this money can actually buy is likely to fall.
To provide more encouragement for parents to save for their children, the previous government launched the Child Trust Fund (CTF). This tax-efficient savings vehicle was available to every child born after 1st September 2002 but was subsequently abolished on 2nd January 2011. The scheme didn’t prove to be a success, largely because CTFs were uneconomical for banks and investment companies to manage and so most chose to stay out of the market. Those that did launch a product did not usually compete particularly hard on price, performance or service! Unfortunately, as a result, many thousands of children are now languishing in expensive and poorly performing funds, with few other options.
Children born either before or after the ‘CTF-years’ are eligible for a Junior ISA (JISA). Rather like their adult-counterparts, JISAs can be either cash-based or linked to investments in the stockmarket. Which of these alternatives will best suit your child will depend largely on the intended period of investment and your attitude to taking investment risk.
The maximum contribution to a JISA for the 2013/14 tax year is £3,720 and (at long last) the Chancellor announced in his recent Budget that the Government will now consult on allowing CTFs to be transferred to JISAs. Watch this space!
One potential downside of both CTFs and JISAs is that a child will have unlimited access to these funds at age 18.
Some parents are uncomfortable about placing too much money into the hands of their children at such a young age: what if they’re just not ready for it?
An alternative may simply be to ‘earmark’ some of your own savings for your children, whilst continuing to hold them in your own name. These funds can then be gifted to your adult children, as appropriate, at a later date; there are however potential inheritance tax issues to be considered with this approach.
It’s also possible to set up a pension plan for a child, with a maximum annual contribution of £3,600. Although these funds can’t be accessed until 55 at the earliest, any parental contributions do attract tax relief so, for example, a monthly contribution of £100 would actually mean £125 gets invested.
Retirement may seem like a very long way off if your child is still in short trousers, but providing income in later life is likely to present a significant challenge for the next generation. Your foresight in helping them start to address this issue at a very early stage may only be fully appreciated in the years to come!
If you have any questions on children’s savings, or other finance-related issues, please call Ian Thomas at Pilot Financial Planning:
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First published May/June 2013 By The Dart
