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Investing for children

You may well have heard various arguments for why the ‘Millennial’ generation could be worse off than their parents or grandparents.

Louis Coke


You may well have heard various arguments for why the ‘Millennial’ generation could be worse off than their parents or grandparents. With many millennials now old enough to be having children of their own, we ask what they and their parents can do to reverse this trend for Generation Z.

Junior ISA
The UK Government allows up to £4,260 to be saved for a child in the 2018-19 tax year. This can be deposited in one lump sum (if your savings allow) or in instalments. For the sake of simplicity, if we assume the allowance did not change for the next 18 years that would allow for maximum contributions of some £76,680 to be saved in a tax efficient environment. Many investment providers (Charles Stanley included) offer the ability to run Junior ISAs. This can be a worthy consideration for parents, or even grandparents, looking to cater for the next generation’s financial future.

Importantly, whilst the children can’t access the funds until they are 18, once they turn 18 the funds are legally theirs. Put bluntly, this means that parents are trusting their children to spend or indeed continue to invest the money wisely in their late teens. When the child turns 18, the Junior ISA rolls over into a ‘normal’ ISA.

Whilst funds are in the Junior ISA, there is no income or capital gains tax payable on the investments. Contributions can be free of inheritance tax as they are treated as a gift, however you should consult your financial adviser before investing.

The benefits of compounding are especially relevant to note here. If we imagine our lucky offspring has £4,260 put into their Junior ISA each year and it grows at a rate of 3% per year, that would equate to a value at age 18 of some £101,359*.

*for simplicity, the above does not account for inflation and fees

Bare Trust
A bare trust is usually evidenced by a trust deed. The beneficiary (child) has an immediate, irrevocable and absolute entitlement to the contents of the trust and takes legal control of it from age 18. The trustees (parents or grandparents usually) have no discretion and cannot change the beneficiary once they have been named. There is no limit on how much can be put into a Bare Trust although you should seek financial advice before entering in to any Trust (or other investment ) matter as there can be other tax consequences.

Small ad hoc gifts or contributions from the trustee’s regular income are often beneficial from an inheritance tax point of view. Larger sums may be treated as Potentially Exempt Transfers (PETs – gifts that will be free of inheritance tax after the donor survives 7 years from the date of making the gift). For bare trusts created by parents on behalf of their child, if income from the trust comes to more than £100 per year then it is taxed as if the parent earned the income.

Junior SIPP
Many people are not aware but there is no minimum age limit on when you can start saving for your retirement. The amount you can put into a pension for a child is limited (for the 2018-19 tax year) to £2,880, however this is then increased to £3,600 by the addition of tax relief courtesy of HMRC.

These funds can then be invested whilst the child is still young, meaning their pension could potentially have been in existence for over 20 years before they start full time work.

The downside here is that access to their pension will be governed by the rules applicable at the time. Currently, SIPPs cannot be accessed until age 55.

For more information or to discuss any element of the above, please contact us.

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