Give your prince or princess a financial head start07 May 2019
This weekend saw the much anticipated birth of the son of Prince Harry and Meghan, Duchess of Sussex. Her Majesty the Queen’s eighth great-grandchild, who has yet to be named, will be seventh in line to the throne and is sure to grow up receiving a premium education and with few worries about his financial security as a member of the royal family.
If the young prince follows his father’s educational footsteps and attends Weatherby, Ludgrove and Eton College, the respective fees are currently £7,415, £9,420 and £14,167 a term for each. However, as the latest data from the Independent Schools Council has revealed, independent school fees continue to rise at a pace way ahead of consumer price inflation.
As most parents know, bringing up children involves significant costs irrespective of the schooling they will receive. For example, many children now go on to higher education, where university tuition fees and living costs can leave them starting adult life with mountain of debt. Therefore, unless you have a royal bank balance, it is important to start tucking money aside, if you are able to, to give your children or grandchildren a financial head start in life.
Jason Hollands, Managing Director of Tilney, gives his top tips for saving for ensuring you are able to provide a feathered nest for your next of kin.
- School Fees: Planning is Vital
“Families who aspire to send their child to independent schools need to plan well ahead as the costs are formidable, even for those on high incomes and last year they increased, on average, by 3.7% – well ahead of consumer price inflation. The ability to finance such costs on a pay-as-you-go basis out of taxed income is a colossal commitment. For families determined to give their children an independent education, it is important to plan carefully and early on to ensure they have a game plan to meet these costs throughout the school years. The last thing any parent wants to do is disrupt their child’s education and friendships part way through because they have run out of money.
“Parents self-funding independent school fees need to start saving as soon as possible to build up a pot of assets that that can be drawn upon in future years. Utilising their own adult ISA allowances – of up to £20,000 a year – might be a first port of call if these are not already being used. ISAs are very flexible, allowing withdrawals at any point without incurring tax.
“Grandparents are often pivotal in supporting children through private education and lifetime financial assistance can also help to alleviate a future Inheritance Tax liability. A very simple option is to set up a “bare trust” on behalf of the child. This means the grandparents – or other family members – gift the money to the child, but they have full control over the assets and where they are invested until the child is aged 18.
“Bare trusts are looked through for tax purposes meaning the beneficiary will be deemed the ultimate owner of the trust assets and taxed as if they owned them directly. This is useful as it allows the use of the child’s Income Tax and Capital Gains Tax allowances, which are typically available in full as children very rarely have any other taxable income.
“By using the child’s allowances, investments held in a bare trust established by their grandparents could work out as being as tax-efficient as an ISA since any income generated would need to exceed their personal allowance, personal savings allowance or dividend allowance before becoming subject to tax. Withdrawals that involve selling an investment and crystallising a gain would take place against the child’s Capital Gains Tax allowance. If this is exceeded, it is likely that any Capital Gains Tax would only be incurred at the 10% rate as the child is highly unlikely to be a higher rate tax payer.
“The gift into the bare trust would be a potentially exempt transfer for Inheritance Tax purposes, meaning there could be Inheritance Tax to pay if the grandparent doesn’t survive the gift by seven years. Nonetheless, that risk can be covered by a simple and cost effective seven-year insurance policy (depending on the grandparent’s health). That gift would need to be considered within the wider context of the grandparent’s financial circumstances to ensure that they can afford to gift this amount, and also in conjunction with other gifts that the grandparent has made over the preceding seven years (to ensure that we capture all of the possible Inheritance Tax risks).”
- Junior ISAs
“Investing in a Junior ISA for your child or grandchild is a great way to build a financial war chest that they can access from age 18. The proceeds could be used for all manner of purposes, such as funding the costs of a degree course, or towards a deposit on their first home. Alternatively the child could remain invested beyond the age of 18, perhaps withdrawing sufficient funds each year to reinvest in a Lifetime ISA, where they will receive a 25% government bonus. Lifetime ISAs are designed to be specifically used towards either the first-time purchase of a property or retirement.
“Simple to set up through an online application form or through the post, a Junior ISA comes in two types; a ‘Cash’ and a ‘Stocks and Shares’ Junior ISA, such as Bestinvest’s Select Junior ISA. With a stocks and shares Junior ISA, your cash is invested and you won’t pay tax on any capital growth or dividends you receive. Your little one can even have both types if you would prefer.
“The maximum total amount paid into a Stocks and Shares Junior ISA for this tax year is £4,368. While the money in your child’s Junior ISA can’t be taken out until they are 18, it is the parent or guardian who opens it who is responsible for managing the account. If your child is 16 or older they can become the registered contact for their Junior ISAs and open a regular ISA or when they turn 18 they can take out any money in their account.”
- Child Pension
“If you're thinking of taking a very long-term approach, and looking to put your child in good stead for their own retirement, then you can also open a pension in their name. You can currently contribute up to £2,880 each tax year, with the key added bonus that it is then boosted by the Government. If you contribute the full amount to your child’s pension, it will then receive a £720 uplift form the Government, making the total amount contributed £3,600. Let us not forget that the pension will also grow free of tax. When your child reaches 18, ownership of the pension will transfer to them and they can start making their own contributions, although they won’t currently be able to access these monies until their 55th birthday at the earliest.
“Saving little and often, perhaps via Direct Debit or a standing order can ease the financial burden of putting money aside for the future. The younger generations are increasingly worried about the rising costs of tertiary education along with rising house prices, meaning that pensions are often left until later on in their lives. By starting the ball rolling for your children, it could mean that it becomes second nature for them to contribute to their pension, or if other expenditures do become a priority, such as buying a home, then it means they have a cushion to kick start their pension and do not have to start from scratch in their mid-30s.”
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.