With Christmas on the horizon, making an investment for your children or grandchildren is a great way to give them a financial start in life, long after the festivities are over. It may not have the same appeal as a beautifully wrapped present under the tree but they will thank you for it years after they’ve finished playing with the latest toy!
If you save regularly from a child’s birth, even small amounts can really add up. There are many ways to invest on behalf of a child.
Make an early start this Christmas
When investing for children it is a good idea to go for something that gives you exposure to a broad spread of companies and sectors. It is important to get the right balance between good growth potential while not taking too much risk or requiring too much in the way of regular management.
You can hold investments on behalf of your child in a bare trust or a designated account. A designated account will be earmarked for your child but will be in your name and treated as your investment, and, as such, any income of over £100 will be taxed at your rate, whereas a bare trust will be treated as your child’s for tax purposes.
A designated account set up in the right way (i.e. irrevocable) is treated in the same way as a bare trust, and, in both cases, if funds originate from a parent and income exceeds £100pa, it will be taxed on the parent. The trustees of a bare trust have legal control until the child reaches the age of 18 (age 16 in Scotland).
Set up a pension
A Stakeholder Pension Plan for a child is available and anyone can contribute (whether it is a parent, aunt, uncle or grandparent), usually having to invest as little as £20 gross. When the child reaches their 18th birthday, they take ownership of the pension plan and make the decisions on its management.
Any money in the child’s pension plan is tied up until they can actually take their benefits, which currently could be any time from age 55 (rising to 57 in 2028).
Junior Individual Savings Account (JISA)
The first and easiest option to choose is a Junior Individual Savings Account (JISA), if the child is eligible. Junior ISAs are flexible, tax-efficient and can only be accessed by the child when they reach the age of 18. Parents and other relatives can save up to £4,080 in the 2016/17 tax year in a Junior ISA. Like adult ISAs, Junior ISAs can be held in cash or stocks and shares, or you can divide the allowance between both.
Child Trust Fund (CTF) transfer into a Junior ISA
Changes to CTF regulations now mean investors can choose to transfer existing Child Trust Funds into Junior ISAs. Junior ISA tax advantages may depend on your individual circumstances and tax rules may change in the future.
Your existing CTF provider may make a charge for carrying out a transfer. If your child does not qualify because they have already used their Junior ISA allowance for the current tax year, or they have a CTF that they do not wish to transfer into a Junior ISA, then there are other options you could consider.
NS&I Children’s Bond
If you are a parent, grandparent, great grandparent or legal guardian, you can invest between £25 and £3,000 tax-free for five years at a time until the child reaches 16, at which point they will gain control of the bond. The interest rate is guaranteed, so you’ll know how much the investment will earn at the end of the five-year term.
But if you need access to the money before the end of the five years, you’ll face a penalty – the equivalent of 90 days’ interest on the amount you cash in.
If you’re able to commit to making monthly contributions then you can often benefit from higher rates of interest with a regular savings account. Maybe any Christmas money they receive could kickstart this…
They’re ideal for savers who are saving for something specific and wish to drip-feed cash into their account in a disciplined way. But these accounts will usually limit the number of withdrawals you can make each year and restrict the amount of money you can invest each month.
Be careful not to miss a payment or exceed the limit on withdrawals, as doing so can cost you interest.
Discuss making financial gifts this Christmas or arrange a review of your finances by visiting www.robertnicholas.co.uk or contacting 01952 820155.