Planning Ahead

Planning Ahead for My Child’s Future

Raising a child has its share of joys and pains. It is especially hard when you have to let your little ones go so that they can pursue university education. However, the economic conditions today have not been gentle; young adults are struggling to get funding for their university education among other needs. As a parent, don’t you sometimes wish you had something to assist your child with as they find their own place in the world?

Well, you can start by preparing early enough. As soon as a child is born, you can decide to make small periodic savings, say £50 a month, in an ordinary bank account. You will be surprised how much that will be in 18 years! Well, this is the safest option. Are there other options that can give you better returns for the same little investments you make?

Savings; Children and Taxes

Here is the good news; you can save as little as you can afford! The trick here is to look for investment options that give you a good return. The most basic investment can give you 3% interest rate, which is okay for a start.

Most parents save in their child’s name instead of their own names for tax reasons. When you save in your child’s name, the interest gained from the earnings will be tax free and the children will still the tax free earnings when they access the funds as adults.

If you want a tax free investment for your child, consider options such as JISA and NS&I Premium Bonds. You can also consider an ordinary savings bank account so long as the allowance does not exceed £10,000. This amount is reviewed annually so be sure to check the updated amount for the current year.

The exception is the £100 rule. This rule requires that amounts exceeding £100 from payments made to a child by a parent should be charged at the parent’s tax rate.

All Junior ISA are totally tax fee, same as adult ISA. That means that when the account automatically becomes an adult ISA once the child hits 18, the interest will still be tax free.

Financial Responsibility

Bear in mind that when you save in the child’s name, they are legally allowed to do as they wish with the amount once they turn 18. At that age, most cannot make sober decisions with such a large sum.

You may need to equip your child with financial literacy or set up discretionary trust instead. Discretionary funds attract hefty administration fees and may only be suitable for those with notable property to bequeath their kin.

Investment Options for Children

Here is a list of the most popular investment vehicles when planning for the future of a child.

Junior ISAs

JISAs were set up in 2011 to replace Child Trust Fund so as to include all the children who were not eligible for CTF. The yearly savings limit for JISA is £4,000 as from July 1st 2014. This amount can be held wholly in shares and stocks or cash or any mixture of the two.

JISA is set up by a legal guardian or parent and the funds cannot be accessed until the child is 18 years old. Junior Individual Savings Account can be held simultaneously with an adult ISA when the child is between 16 and 18 years, which boost the tax free earnings for those two years. You can read more on JISA for a better glimpse of how this investment option works.

Child Trust Funds

CTFs are investment vehicles launched in late 2005 to encourage parents to save up for their child from the day they are born. As an incentive, the government would deposit £250 into the child’s account after birth, and £250 more when the child is 7 years old.

CTFs have not been replaced by JISAs; the government no longer issues vouchers since January 2011. Existing accounts will still be open, though the limit of savings has been hiked from the usual £1200 to match JISA’s.

Note that CTFs funds cannot be transferred into JISA. Additionally, children who are eligible for CTFs and were born between September 1st 2001 and January 2nd 2011 cannot have a JISA. However, transfers from CTF to JISA are made possible since 2015.

Child SIPPs

Child SIPPs are a lot like pension plans for kids. With this option, a parent can comfortably pay into a pension for their child as soon as they are born. Child SIPPs, like any other adult pension plan, is eligible for 20% tax relief.

This is a brilliant plan for parents who want to plan for their children’s twilight years – perfect for parents who are really focused on planning their children’s future.

18 annual £2,800 payments into a child SIPP (Self-Invested Personal Pension) will be £1,053,405 by the time the child gets to pensionable age (65 years). Like any other pension plan, it is only accessible when one turns 55 years old.

Fixed Rate Bonds and Cash Saving Accounts

Fixed rate bonds and savings notice accounts, like any other adult savings account, offers a better return than regular savings accounts. Additionally, you are allowed to save a lot more than JISA or a regular account allows. This is an appropriate option for parents who wish to put away more for their children.

If you would like to cash in on the investment earlier than JISA allows, these are the investment options for you; the carrying notice period is 1 to 5 years.

Trusts

A trust is an arrangement where a ‘trustee’ is given the legal responsibility to hold assets on behalf of a ‘beneficiary’ (the children). The assets include property, land, shares, cash money or valuable antiques. The ‘trustee’ manages these assets according to the settlors’ wish.

Bare trusts give the children access to the money once they turn 18. Discretionary trusts allow trustees to determine when and how much can be paid. You can choose either depending on your plan. Get more about these on HMRC’s website.

Stocks and Shares versus Cash

Regardless of the investment option you choose for your child, you will still need to choose between cash and stocks and shares. Did you know that you can save 100% of a JISA in cash? However, before you decide on which variety you want, be sure to know the pros and cons of each.

Keep in mind that cash savings may not pay out an interest rate higher than the current inflation rate. This means that you stand a chance of losing your cash every year depending on the economy. Stocks and shares on the other hand give a better return on investment.