If you have children, grandchildren – or even great grandchildren – you’ll probably want to give them financial help to deal with the challenges of life.
You will just as probably want to make sure that they, and not the taxman, receive as much of it as possible. The taxman may see simply handing over assets as an attempt to avoid death duties. There is an annual £3,000 gift allowance for inheritance tax (as per current tax year 2019/2020).
But equally, there’s no point in just sitting on the cash, and having someone hand it over in an envelope when you are gone. The solution can be to invest on their behalf. But what is the best way for you to invest your spare wealth so that it can grow for them?
At Continuum, we can help you find the answers.
Investing for your adult children
Your adult children will probably want help to get on the property ladder, and perhaps as they climb it as well.
If a house deposit is still some way off, one way to help them could be a Lifetime ISA, as the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. It can help buy that home or be used towards a pension.
They can put in up to £4,000 a year into a Lifetime ISA up to the age of 50.
The Lifetime ISA limit of £4,000 counts towards their annual ISA limit. This is £20,000 for the 2019 to 2020 tax year.
They must be 18 or over but under 40 to open a Lifetime ISA.
They can withdraw money from the ISA if they’re:
- buying their first home
- aged 60 or over
- terminally ill, with less than 12 months to live
You’ll pay a 25% charge if you withdraw cash or assets for any other reason.
If you transfer cash and assets from a Lifetime ISA to a different ISA before the age of 60, you’ll have to pay a withdrawal fee of 25%.
Investing for school age children
It is a little-known fact that children are eligible for pension savings from the day they are born. It is an increasingly popular choice for generous parents and grandparents.
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 government boosts contributions to £3,600 – making it potentially a very rewarding investment.
Starting young gives cash more time to grow, so that even with a conservative investment strategy, compound interest can build a sizable pension pot. Simply making the maximum contribution until the child is old enough to start work would mean a substantial sum. With nearly half a century of compound growth, it could grow into a worthwhile pension pot by the time that they retire, even if they never make a contribution themselves.
It could be larger still if they continue to make contributions themselves in the intervening years.
What’s more, under current rules, money in a pension is tied up until the age of 55. So, savings are kept out of reach, safe from temptation, helping ensure that they can carry on growing.
Investing for very young children
You may need to find ways to invest for those not old enough to tell chocolate money from the real thing.
For very young children, you might be able to find the best returns by investing the money in the stock market. Historically it is the best-performing asset for the long term – 10 to 20 years or more.
The worry is that you might not be around to manage the investment for them and decide when they are ready to receive it. One solution can be to invest in a passive fund that invests in stocks around the world – and to set up a trust fund.
This is much easier than you might think and can have some substantial tax advantages for you and your estate. 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.
At Continuum we can help you set up a trust fund that will avoid problems with the taxman.
Getting some help
Of course, these solutions are only some of the investment possibilities to consider. Whatever 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 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 suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you 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.
The Financial conduct authority does not regulate taxation and trust advice.