‘How do I invest £60,000 for a 12-year-old?

A reader who has taken charge of raising her nephew needs help safeguarding his future. Harry Brennan reports

Having brought up four of her own children, Pauline Stanley, 67, never thought she would become a parent again in her 50s. But 10 years ago, owing to family issues, she became the legal guardian of her two-year-old nephew, Jake.

Now 12, Jake has special needs that involve his coordination and memory. Last year he came into a £60,000 windfall following the death of his grandmother – money left to help him get on in life. Mrs Stanley, who runs a holiday let business in Bradford- onAvon, Wiltshire, now faces the challenge of safeguarding this legacy for her nephew.

“My mother passed away in March last year and left this money for Jake,” she said. “Her last wishes stipulated that my husband and I are to look after the money until Jake turns 26, when we hope he will be in a better position to use it himself,” she said.

The money will hopefully be used to pay for further education or accommodation or to help Jake set up a small business.

“He goes to normal school but gets extra help, and loves anything to do with farming, so we are hoping he follows his passion into a career. We think he might end up at the local agricultural college. As a family of selfemployed people we would be happy for him to set off with his own venture at some point too,” Mrs Stanley said.

“It is important the money is set up in such a way that it can continue to be managed in case we are no longer around. We are also keen to preserve it against rising levels of inflation.”

Poppy Fox Investment director at Quilter uilter Cheviot, a wealth manager ger

Mrs Stanley will be investing this money for at least 14 years so she can afford to take ke some risk in the hope of growing rowing the pot to substantially y more than £60,000.

However, it’s important tant to find the right balance. . Given her nephew’s health concern, ncern, his ability to bear loss should hould be relatively low so I do o not recommend anything riskiskier than what wealth mananagers call a “balanced ed portfolio”. This should d be a mixture of shares, ,

Pauline Stanley, below, has a nephew who adores farming bonds and maybe some property, with no more than 60pc allocated to stock markets.

There is certainly an argument for having less in shares, but doing so will not allow the funds to keep ahead of inflation and grow in real terms. Inflation is already at 5.5pc, its highest for 30 years, and is expected to get even worse. Anything that takes less risk might struggle to beat the rising cost of living.

This balanced approach should incorporate different assets and geographical exposure to spread the risk – diversification is key.

Mrs Stanley should consider investing around 60pc in stocks spread across Britain, America, Europe, Japan, the Far East and emerging markets, such as China and India. Another 20pc should be put into bonds, those issued by governments and companies. Another 15pc should be in property, infrastructure and gold funds, with the rest in cash.

The couple should consider how best to take advantage of the recent market falls. For example, they could buy the Polar Capital Technology investment trust as a long-term play on the move to an increasingly digital world.

Scottish Mortgage is another investment trust available at a lower share price. It aims to buy innovative and developing companies with a longterm approach. Both of these funds have seen significant falls this year, so it could be a good time to buy.

Andy Butcher Chartered financial planner at Raymond James, a bank

As the nephew is a minor, this money has b been placed in a trust, which Mrs Stanl Stanley and her husband will manage as trust trustees. This means they cannot simply invest via an Isa, which are only f for individuals. Trusts are their own legal entity and they are taxed harshly. Any income of more than £1,000 is subject to 38.1pc tax if derived from dividends, or 45pc from anything else. We typically recommend trustees place the money in an “international bond”, a type of tax shelter not dissimilar to an Isa. This means any tax due can be deferred until the point the bond is surrendered. With a bond, gains are taxed as income. While rates are higher than on capital gains, Jake will be able to draw the money down bit by bit. If he is a basic- rate taxpayer, or even a non-taxpayer, it could be much more tax efficient.

If he wants to spend the money on higher education, and has no other income in the year, he could withdraw the money without paying any tax at all. When the bond is surrendered, Jake can use his tax- free personal allowance (currently £12,570, but possibly higher by then) and also potentially his £1,000 savings allowance. There is also a lesser-known £5,000 “starting rate for savings” allowance for lower earners. With these combined, he could take out £18,570 tax free.

As the bond will still be invested, and assuming growth of 5pc to 8pc a year, one would hope the pot could be worth between £120,000 and £175,000 by the time Jake turns 26.

If the pot is worth £ 120,000 and if Jake has no income, and assuming tax rates have not changed, the whole fund could be withdrawn over four years without paying a penny in tax. This is because only the £60,000 profit would be liable for tax and the original £60,000 could be withdrawn tax-free.

Once the bond is set up, 75pc of the money should be invested in stock market funds and around 12.5pc each in bonds and diversifiers such as gold and infrastructure funds.

We would include Royal London Sustainable Leaders Trust, Man GLG Undervalued Assets and Allianz UK Opportunities for UK stocks; R&M European fund for Europe; HSBC American Index for the US; and BlackRock Global Unconstrained Equity and Premier Miton Global Smaller Companies for global exposure. Elsewhere we like Baillie Gifford Japanese, JP Morgan Emerging Markets Equity and Matthews China Small Companies.

We also like Nomura Global Dynamic Bond for bonds and Jupiter Gold & Silver, Foresight Global Real Infrastructure and Cohen & Steers Diversified Real Assets for investments that are uncorrelated to bonds and stock markets.