Parent, grandparent – or even great grandparent – you may want to give your younger generation some financial help.
You could, of course, simply remember them in your will. But there could be a better solution.
At Continuum, we are looking at advising you on investing on their behalf.
Investing could potentially make money grow
Giving cash is simple. But it is not very useful for a toddler and altogether too tempting for a teenager. Investing could be the answer. Thanks to the potential of compound growth a small sum grows into a large one that can be kept safe until the child is mature enough to use it properly.
What’s more, if it is properly arranged, an investment made on behalf of a child can not only be kept out of the taxman’s reach, he may be obliged to contribute to it.
But how should you invest for a child?
All Individual Savings Accounts (ISAs) are tax-free. Junior ISAs are for those under the age of 18. Parents, grandparents and friends can put up to £9,000 in the current tax year and unlike Adult Cash ISA’s which still mean unrewarding rates, some Child Cash ISA’s actually offer fairly generous returns.
Stocks and Shares Junior ISAs also benefit from tax efficient profits. Because they are true investments (rather than savings) there is some risk – but in exchange, they can provide the potential for a greater return.
The money is the child’s but they cannot take the money out before they turn 18. This means a Junior ISA might not help if they need money in the early teenage years – but could be ideal to help with education, or a first home.
Another possibility could be a Lifetime ISA. If you are investing for your child or grandchild who is over the age of 18. Both cash or stocks and shares LISAs exist, but for anything less than five years, a cash LISA might offer more predictable returns.
Lifetime ISAs are for individuals aged between 18 and 40 and allow up to £4,000 from your allowance to be put away each tax year. You will earn a government bonus of 25% as well as growth on your investment – but your investment can only be used to buy a first home, you are aged 60 or over to fund retirement or are terminally ill with less than 12 months to live.
You will pay a withdrawal charge if you withdraw cash or assets for any other reason (also known as making an unauthorised withdrawal). This recovers the government bonus you received on your original savings. The charge is currently 25%.
You can transfer money from a Help to Buy ISA to a Lifetime ISA. If you transfer money from a Lifetime ISA to a Help to Buy ISA you’ll have to pay the 25% withdrawal charge.
Children can have pension savings from the day they are born. HMRC figures show that around 60,000 under 18s have a pension plan.
A pension arranged for a child can receive up to £2,880 year. It will deliver 20% tax relief, to add an extra £720 a year. So the taxman boosts contributions to £3,600 – making it potentially very rewarding investment. With 60 or so years of compound interest, simply making the maximum contribution until the child is old enough to start work could help it to grow into a worthwhile pension pot by the time they retire, even if they never make a contribution themselves. It would be larger still if they start to pay in themselves once they are old enough.
If you have a large amount to invest for the long term – 10 to 20 years or more – the stock market could be the solution, but if you feel you might not be around to manage the investment, you could invest in a passive fund and to set up a trust.
There are several types, the most common being bare trusts and discretionary trusts. In both cases, you set up the trust with the child as the beneficiary and nominate trustees to help make decisions and administer the money along the way.
In a bare trust, the child will receive the money as soon as they turn 18. Under a discretionary trust, the money is paid when the trustees feel the time is right.
This is not an exhaustive list. Premium Bonds have been a favourite with grandparents (if not children) for generations. They pay out at an average of 1%, but returns are not guaranteed. Premium Bonds work with prizes being drawn at random, so they might be considered a fun investment, which could bring in a major windfall, but probably will not.
You could look at savings accounts. Some junior accounts offer some fairly attractive returns, as banks see it as a way of getting customers for the future.
Of course, these solutions are only some of the investment possibilities to consider. Whatever your resources and the age of the children you are investing for, we can work with you to find the most appropriate investments and avoid the tax pitfalls.
To help get your children off to a better financial start, simply call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to an investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of your investment can go down as well as up and you may not get back the full amount invested
By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.
By saving in a Lifetime ISA instead of a qualifying pension scheme you could lose contributions by your employer, if any.
Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits.
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