Saving for your child’s future
SAVING for your child’s future is a fantastic way to help them pay for some of life’s big expenses when they get older, such as university, marriage or buying their first home.
Yet many parents face the dilemma of whether they want their child to have access to the money set aside once they become an adult at 18, fearing they’ll squander the cash before they can use it for something important.
Leaving aside tax considerations, saving for your child is more of an issue surrounding mindset. Wanting to do something for them doesn’t mean it needs to be in their name.
Instead, does it mean that you should just invest under your name in the most efficient way possible with a view that the money is available for your children when they need it in the future? This has the added advantage of still being available for you to use in the event of a financial catastrophe of your own.
Any investments you hold in your own name will be included in your estate for inheritance tax purposes when you die. But if your estate is, for a couple, worth less than £650,000 plus the property nil rate band which will increase the amount you can leave to £1,000,000 by 2022 then there’s no reason not to keep money for your children in an ISA and just give it to them when you choose.
You’re in control of it so if your son or daughter finds a partner who is less than desirable and you’re not happy about it the last thing you’re going to want to do is give them money in their hands.
Another option that people often consider in these circumstances is creating a trust. However, if it’s an absolute trust their children are absolutely entitled to it at some point in the future. An alternative would be to create a discretionary trust where there is more control over who benefits and when.
You could set up a general investment account (GIA) which might hold a series of investments in shares or unit trusts that remains in your or your partner’s name. Provided you’re not generating interest and dividends of more than the personal savings allowance (currently £1,000 pa) and the dividend allowance (currently £2,000 pa) it’ll be broadly the same tax-wise as an ISA would have been.
In this scenario you can use your annual Capital Gains Tax exemptions to sell down profits in an economical way such that you don’t pay tax on the profits that you make either.
You and a partner are entitled to £23,400 of annual capital gains allowance between you that you can use against profits from selling down shares and unit trusts. That helps you to keep the investments in your control in a tax-efficient manner for the benefit of your children later on.
Another often overlooked way you can save for your child’s future is by starting a pension for them. This may seem counterintuitive as the usual reasons for saving are the pivotal moments in life such as those we mentioned earlier.
Putting money into a pension pot for your offspring could make an enormous difference to their financial security in later life. You can fund their pension from the moment they’re born up to £3,600 annually; contributions attract 20% tax relief.
And just think, if you pay the maximum amount of £3,600 in each year from birth your child’s pension pot could be worth in the region of £700,000 when they come to retire, assuming an average 4% growth.
The downside is that your children wouldn’t be able to get at the money until they reach the minimum pension age (currently 55 but rising to 57 in 2028 after which it will be linked to 10 years under the state pension age).
Bear in mind that you can set up a pension alongside an ISA and a
GIA to cover all bases without any restrictions.
The long and the short of it is that for most people there are some straightforward ways to make the most out of saving for their children without having to go down the route of setting up an investment in their child’s name that they automatically become entitled to.
Andy lives in Wokingham and has worked as a financial adviser for over 30 years. He is married with three grown-up children. Faron Partnership offers personal financial advice, including retirement, investment and estate planning. Any information or views expressed in this article should only be acted upon within the context of your own circumstances with the help and guidance of a professional financial adviser. Faron Partnership Ltd is an independent financial adviser which is an appointed representative of ValidPath Ltd which is authorised and regulated by the Financial Conduct Authority.