Many parents want to give their children the best possible financial start in life, and grandparents frequently want to help out too.
Private school education from age 5 to 18 could easily result in a total cost of up to £200,000 - and that's before you start to consider further education costs. Rising tuition fees also mean that graduation debts of more than £40,000 could become commonplace.
In addition to the spiralling costs of education, it is becoming increasingly difficult for offspring to climb on to the housing ladder, and substantial deposits of up to 30% can sometimes be required before you can secure a competitive mortgage interest rate. Parents are also concerned that their children may have to work far longer to secure a decent pension. The extension of the state pension beyond age 70 may not be too far away, and the closing of final salary pension schemes makes providing for a decent income in retirement a daunting prospect for those just embarking on their careers.
With all of the above headwinds, making early financial provision for children has never been more important. Most parents tend to fund education costs from taxed income, but this is not very tax efficient and can put a real strain on already hard pressed family budgets. Advanced planning is essential to ease the burden.
The main investment choice for children is between deposit and stock market-based investments. While historically stock market investments have produced better returns in the long term, shares and the income derived from them can be volatile. On the other hand, with rock bottom interest rates, getting a positive real return on cash deposits is almost impossible.
- Many banks and building societies offer special accounts for children and a cash-based account is the only sensible choice for short term savings where funds are needed within five years. Children can make use their own income tax personal allowance, meaning that bank account interest can be paid gross.
National Savings and Investments
- Backed by the Government, this is a very secure saving option.
- Premium bonds can be purchased for children by their parents or grandparents.
- Children's Bonus Bonds are five-year bonds which can be taken out for children up to the age of 16.
- Children aged 16-18 can open a Cash ISA and deposit up to £5,760 annually.
- Children under 18 who are not eligible for a Child Trust Fund can now open a Junior ISA.
- Cash and investments within the Junior ISA are sheltered from income and capital gains taxes.
- The annual contribution limit is £3,720 for the 2013/14 tax year.
Child Trust Funds (CTFs)
- These have now been withdrawn for children born after 2nd January 2011.
- For existing CTFs, the annual contribution limit has been raised to £3,720 in line with the new Junior ISAs.
- These are funds which help to minimise risk by pooling investors' money and spreading it across a portfolio of shares. This means that if a small number of the companies perform badly, it only affects a proportion of your total investment.
- A professional investment manager will monitor your child's shareholdings for you.
- Children have their own capital gains tax allowance, so this type of investment can be very tax efficient.
Tax-exempt Friendly Society Plans
- These are regular saving endowment policies sold by friendly societies designed to run for a minimum of 10 years
- Savers can't usually miss payments or alter the amount of the savings, and early withdrawals can be subject to a penalty and a potential tax bill.
Individual Savings Accounts
- While children are not eligible to take out a"full" ISA, parents who wish to set money aside for future expenses should consider maximising their own ISA allowance for this purpose, to shelter their savings from tax.
- Adults can currently invest up to £11,520 per year in an ISA.
- Adults can now put money into personal or stakeholder pensions on behalf of children or grandchildren.
- Up to £2,880 per year can be invested in a pension for a child, and tax relief from the government boosts the contribution to £3,600.
- However, the money cannot be accessed until the child reaches 55.
In summary, there are many tax efficient ways to give your children's savings a kick start, and the earlier you put a plan in place, the better. It always makes sense to seek professional assistance to make sure you have considered all the options and to ensure your plan remains on track.
This article appeared in issue 53 of The SCRUM Magazine. View it online here.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.