Give your child the best possible start in life

We are all guilty of spoiling younger members of our families with toys and gifts, especially after the past year when we may not have been able to see extended family members as much as we would like – splashing out on gifts or birthday presents is understandable.

According to research (1) spending on grandchildren increased by an estimated £608m at Christmas 2020, to an estimated total of £2.4bn, highlighting how people were eager to splash out and bring some festive cheer despite COVID restrictions which may have been in place over the holidays.

However, despite people’s good intentions, research (2) shows that £760million worth of presents are annually unused, unwanted, exchanged or thrown away across the UK on average.

Next time you, or a family member is considering purchasing a gift for your child, why not consider investing the cash into a savings account or other form of long-term investment?

Here are a few ways you could invest in your child’s future, giving them the best possible start in life.

Pensions

Starting a pension for a child may seem a little premature but this can give them a head start and lead to significant sums of money for later life – compound interest will have decades to make a significant impact with relatively modest input.

Even as a non-taxpayer, children are still able to get basic-rate tax relief on contributions. The maximum that can be saved in a child’s pension is £3,600 a year, which would mean making a net contribution of £2,880, with the Government automatically topping this up by 20% in the form of tax relief.

Any parent or legal guardian is able to set up a pension for a child. Once they reach 18, the pension will transfer into the child’s control and they can then start to contribute to it themselves. However, they will not be able to access the funds until their minimum pension age i.e., 55 (set to increase to 57 in 2028, with further increases in line with the state pension age planned).

Junior ISAs

Junior ISAs are a popular way of investing for your child’s future, due to their greater flexibility and accessibility to funds from the age of 18. Deposits can be made annually up to the maximum Junior ISA limit for that particular tax year – which for 2021/22 is £9,000.

Whilst some cash ISAs have more favourable rates than their adult counterparts, stocks and shares ISAs are also an option. You are able to invest your child’s money in funds, shares, investment trusts, corporate bonds and gilts, however, these types of investments come with the risk of market fluctuations as the value of your child’s savings can go down as well as up.

Junior ISAs can also benefit from compound interest if contributions are made from an early age and the available allowances are maximised.

Regular savings

Putting something aside in the form of savings is always better than nothing and children’s savings accounts often benefit from more favourable interest rates. These accounts are usually held in the child’s name until a certain age, with parents/guardians having access to the money. Once a considerable amount has accumulated or the maximum for the savings account is reached, it may be beneficial to open a Junior ISA or Junior pension with the funds.

National Savings & Investments (NS&I) Premium Bonds

National Savings & Investments (NS&I) Premium Bonds are unlike other savings or investments, where you earn interest or a regular dividend income. With Premium Bonds, you’re entered into a monthly prize draw where you can win between £25 and £1,000,000 tax free. On average, 1 in 3 people win a prize each year with a £1,000 investment.

Premium Bonds can be bought on behalf of your child, grandchild or great-grandchild – you must be aged at least 16 to purchase them yourself. The minimum investment is £25 up to a maximum investment of £50,000.

Bonds can be beneficial as they are backed by HM Treasury, so you can trust in the fact that your money is 100% secure. However, that doesn’t mean that the bonds offer the highest rates of interest and there are also penalties for cashing them in early.

NS&I previously offered Children’s Bonds, however, these are no longer available as of 30 September 2017.

Bare Trusts

Bare trusts, sometimes known as an absolute or fixed interest trust, are an additional way of accumulating savings for a child. A bare trust is a legal arrangement where money or assets are held by a Trustee (parent or guardian) for the benefit of the Beneficiary (the child). Once the Beneficiary has been named, this cannot be changed once the trust is established. This could cause issues should any other children/grandchildren are born following creation of the trust as they would not benefit from the trust assets.

Money within the trust can be held or invested at the Trustee’s discretion. Bare trusts allow Trustees to retain control over when and how monies are distributed until the child reaches the age of 18, at which point the child assumes control of the trust.

Gifts into trusts can assist in inheritance tax planning but be aware of the potential income and capital gains tax implications for both the child and the donor. If the Beneficiary has no other taxable income, as is generally the case for a child, they would have their full tax allowance available to offset against any income or capital gains tax arising from the trust assets.

Discretionary Trusts

A Discretionary Trust can be set up by an individual or couple who normally appoint two or more Trustees to manage the assets for a number of potential beneficiaries.

By setting up a Discretionary Trust, the Trustee is empowered with managing the estate and deciding at their discretion, how, when and to whom they distribute the funds.

A Discretionary Trust can be set up during your lifetime, or you can write it into your will, and in the event of your death, your wishes will be actioned. A Letter of Wishes can be prepared alongside your will which effectively serve as instructions to your appointed Trustees advising them on when, and in what circumstances your beneficiaries should receive assets. However, this is not a legally binding document, and your Trustees are by no means legally bound to abide by its contents.

Discretionary Trusts are beneficial if you want your wealth to be distributed between groups of beneficiaries either in your lifetime or after you die. Additionally, as the Trustees are able to control when the assets are distributed to Beneficiaries, they can decide the right time for the assets to be distributed, rather than as soon as they reach the age of 18, for example.

Discretionary Trusts are complex legal documents – it is important to remember that you are putting your wealth in the hands of other people who you must trust to distribute your wealth in accordance with your wishes. If you don’t feel comfortable appointing someone you know to be your Trustee, you can appoint a solicitor to act as a Trustee.

How we can help

Saving for children can be a beneficial way of passing wealth onto the next generation, whilst utilising tax allowances and assisting in inheritance tax planning. To discuss your specific requirements in more detail and ensure you are making the right decision for your child’s future, contact our wealth management team (01254 679131 / wealthmanagement@pmm.co.uk) who will happily arrange a free consultation.

 

– Research undertaken by Insurer SunLife who surveyed 2,000 adults who were representative of the UK geographically and by income, and 2,000 children.

– Research undertaken by Opinium Research between 11 and 20 November 2020. A sample of 1,002 UK parents with children under 18 years of age were interviewed.

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