My goddaughter celebrated her 18th birthday recently and I had the very pleasurable duty of signing over the investment I had started for her on her Christening day. I can’t pretend she understood every word of my explanation of what is a Unit Trust, but it has prompted me to think of the different ways in which investments can be made on behalf of children and grandchildren, or indeed godchildren.
There are many ways that investments for children can be set up but the first, and probably most important question, is one of control.
When and how do you want the child to gain access to, or control of, the money? Is 18 too young? Is 25 too late? Is any fixed date a good idea? What about age 60? (I’ll explain that one later).
Most people have heard of the Junior ISA (JISA), but what is not so well known is that a Junior ISA automatically converts to an Adult ISA on the child’s eighteenth birthday. In other words, whether you think the child is capable of sensibly managing what could be thousands of pounds at the age of 18 is totally irrelevant. The money will be theirs to do with as they wish and there is nothing you can do about it. Which is why we are not so keen on the JISA.
So what are the alternatives? Well, the supposed attraction of the JISA is that it is tax-free. But, since April 2016 every basic rate taxpayer (including a child) has a personal savings allowance of £1,000, and of course every child still has the current standard personal income tax allowance of £11,000 a year. So, you could open a bank account for a child and still pay no tax – although be aware that a parent (but not a grandparent) would be liable to tax where interest is £100 or more in a year. Interest rates are poor at the moment and with a potentially very long term there is a good argument for an equity-based investment. Equities pay dividends which are taxable, but the new dividend allowance of £5,000 a year would cover a 4% dividend on a £125,000 investment (but again, the £100 income limit applies if the investment is gifted by a parent). So there are now plenty of tax-efficient options that could be considered.
No child can hold an equity investment directly in their own name, but an adult can hold one in a designated account; you open an investment in your name but with the child’s name appended as a designation. This has the effect of creating a bare trust – you are the trustee and the child is the beneficial owner. It is preferable however, to create a formal bare trust since, to be effective, the gift must be irrevocable, and without a formal trust deed it is possible HMRC could argue the gift is not a true gift and then tax you. The beneficial owner of a bare trust becomes an absolute owner at age 18, so the same problem of access arises…but only if the child knows the trust exists, and you are under no obligation to say so (unless of course they earn enough to have an income tax liability!).
So what of that ‘age 60’ I mentioned above? Well, it is possible to open a pension plan for a child and invest from as little as £10 per month to £2,880 per year and receive tax relief on the contribution. Every £100 paid into the pension becomes £125 after tax relief is given. Once the child starts earning they can take over funding the pension, or indeed you can continue to fund it into their adulthood, within certain limits. As you may know, a personal pension cannot be accessed until age 55 at the moment. But as the State Pension age increases, so will this minimum age. It is expected to be 58 by 2046, and will increase as life-expectancy increases; so a child born today could well have to wait until age 60 or beyond before they can access a pension. Sixty years is a very long investment term – but is it not a great way to instil a savings culture at the same time as helping to secure a future retirement? A great legacy; and think of the bragging rights in the playground.
These are a few ideas we have and there are plenty more which we can talk about – just telephone or send an email if you would like to explore children’s investments further.
Philip Chandler APFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee
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