Create a velvet throne of financial security for your own little prince or princess24 April 2018
With the arrival of the third child of the Duke and Duchess of Cambridge, the nation is in the midst of Royal Baby fever. While the public can only speculate for now on the name of the new prince, one thing that cannot be in doubt is that he is certain to have a very financially secure future as the fifth in-line to the throne.
Given most children are not born into great wealth, providing them with a financial head start in life involves planning well ahead of adulthood. Jason Hollands, Managing Director of Tilney, highlights some of the main options available to parents and guardians:
“Junior ISAs are a type of savings and investment account for children where all of the returns are tax free. They must be opened by a parent or legal guardian, but once opened grandparents and other family members can make contributions up to an annual limit. This is currently £4,260 and adjusts each year in-line with inflation.
“While a wide choice of investments and savings options are available to choose from through accounts such as the Bestinvest JISA - and these can be changed by the parent registered to the account over the time - no withdrawals can be made before the child is aged 18. At this point the Junior ISA will convert into an adult ISA and the child will gain full legal ownership. This makes Junior ISAs potentially very useful for building up a fund to help see a child through a future degree course or towards a deposit on their first home.
“Assuming the allowance increases on average by 2% each year to adjust for inflation, then a new child born this tax year might be able to see subscriptions of over £91,216 made into their Junior ISA over the next 18-years. If the investments delivered an average compound annual return of 6% pa then the value of the Junior ISA could be £163,699 by the time they are 18-years old.”
“An option for those parents in a position to invest more than the Junior ISA allowance each year is to do so through a “bare trust” which is the simplest form of trust arrangement. Those setting up the trust will make all of the investment decisions, but the account will be held in the child’s name and they will get full access to the money at the age of 18.
“There is no limit to the amount that can be invested in bare trusts, and they can hold most types of investments. If the trust produces more than £100 of income and has been set up by the parents, then the income is added to the parents’ tax bill. Otherwise it is subject to the child’s tax rates, which are usually lower.”
Set aside your own ISA
“It is understandable that some parents worry about the prospect of their child gaining access to a potentially large sum of money at the impressionable age of 18 and would prefer to retain control over the assets. A simple option might be for the parent to maximise their own ISA allowance, which is £20,000 pa, if they are not already doing so. They can then use the proceeds towards their children either by settling costs of things like school or college fees directly, or by making cash gifts to the child at a later date when they are comfortable doing so. Gifts of up to £3,000 can be made each year which are exempt from an estate for inheritance tax purposes but larger amounts also become potentially exempt providing the person making the gift lives at least seven years afterwards.”
Set up a Discretionary Trust
“For those able to set aside a larger sum of money earlier on, a Discretionary Trust may be an appropriate way to pass wealth on across the generations. The key benefit of setting up a trust is that the trustees of it are the legal owners of the assets but obligated to put the interests of the beneficiaries of the trust above their own. Trust funds give parents or grandparents control over who receives the money, when it can be accessed and what it can be spent on. This means they can be used to make gifts across several generations, for example you could pay for a child’s wedding then a grandchild’s school fees.
“Discretionary trusts are set up with a gift from the settlor (usually a parent or grandparent). The settlor can then act as a trustee to manage the assets. Trusts can be effective for larger sums (usually more than £100,000) and there is no upper limit to the amount you can pay into one, but for lower amounts the benefits may be outweighed by charges.
“The assets in a trust leave the settlor’s estate after seven years, after which they are free from Inheritance Tax. However, there are considerations to make when setting up a trust and it may also need to produce annual accounts and tax returns, so there could be ongoing costs.
“There are a number of different types of discretionary trust available. Each has different features and tax rules, so you should consider speaking to a financial planner if you are interested in setting up a trust.”
“Many people are unaware that children can also have a pension and even though very few will have any earnings, the Government will still provide a top up in respect of basic rate tax. Up to £2,880 can be subscribed each year and these will be topped up by the Government to the tune of £720 to create a gross contribution of £3,600 per annum.
“Fully funding a child pension for 18-years would involve £51,840 of contributions and receive £12,960 of Government top-ups. If these delivered an average annual compound growth rate of 6% after costs, by the time the child was aged 60, the pension would be worth £1.48 million. While it may seem odd supporting a child’s retirement plan, by relieving some of the pressure on them to save for their retirement, it creates the scope for them to initially focus their own earnings on objectives such as cancelling the millstone of graduate debt or getting a foot on the property ownership ladder.”
The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. This press release does not constitute personal advice. If you are unsure about the suitability of any investment, you should seek professional advice. Past performance is not a guide to future performance. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. Different funds carry varying levels of risk depending on the geographical region and industry sector(s) in which they invest. You should make yourself aware of these specific risks prior to investing.
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.