Building wealth for a solid financial future

As a parent, guardian or grandparent, you’ll want to provide the best future for your children or grandchildren that you can. Christmas is an excellent time to encourage children to start thinking about the value of money. Many children have hundreds of pounds spent on them at Christmas. But could that money be put to better use? Rather than buying yet more toys for your children or grandchildren, why not consider setting up a tax-efficient Junior ISA for them?

With today’s kids likely to need thousands of pounds to get them through university and onto the property ladder, a Christmas gift that will help with some of these expenses is well worth considering.

If the investment is allowed to grow, it could build up into a sizeable sum. The money could then be given to the child as an adult. The capital may be enough to cover tuition fees and possibly board and lodging as well, or a deposit for their first property.

Junior Individual Savings Account (JISAs)

A JISA is a tax-efficient children’s savings account where you can make contributions on the child’s behalf, subject to an annual allowance. Any gains do not incur Capital Gains Tax and they will not be considered part of the parents’ or grandparents’ estate for Inheritance Tax purposes.

Nevertheless, the child will automatically get access to the money when they turn 18 and can choose what to do with it. If the account stays in the parents’ or grandparents’ names, however, the parents or the grandparents would be able to decide how the money is used, but it would be considered part of their estate for Inheritance Tax purposes for seven years after it has been gifted to the adult child or grandchild.

There are two types of JISA – a Cash JISA and a Stocks & Shares JISA:

• Junior Cash ISAs – these are essentially the same as a bank or building society savings account. But Junior Cash ISAs come with one big advantage: your child doesn’t have to pay tax on the interest they earn on their savings, and you don’t have to either.

• Junior Stocks & Shares ISAs – with a Junior Stocks & Shares ISA account, you can put your child’s savings into investments like shares and bonds. Any profits you earn by trading shares or bonds are tax-efficient.

A child’s parent or legal guardian must open the Junior ISA account on their behalf. Money in the account belongs to the child, but they can’t withdraw it until they turn 18, apart from in exceptional circumstances. They can, however, start managing their account on their own from age 16.

The Junior ISA limit is £4,260 for the tax year 2018/19. If more than this is put into a Junior ISA, the excess is held in a savings account in trust for the child – it cannot be returned to the donor. Parents, friends and family can all save on behalf of the child as long as the total stays under the annual limit. No tax is payable on interest or investment gains.

When the child turns 18, their account is automatically rolled over into an adult ISA. They can also choose to take the money out and spend it how they like.

Pensions

A pension is one of the greatest gifts you could give children this Christmas. Children’s pensions benefit from the same advantages as adult pensions. That means no tax is payable on income from investments or capital growth in the pension, provided they remain within the annual and lifetime allowances.

The annual allowance is the limit on the amount that can be contributed to a pension each year while still getting tax relief. For the 2018/19 tax-year, it’s £40,000, or the value of your whole earnings – whichever is lower.

The lifetime allowance relates to the value of all your pensions. If this is more than £1,030,000, anything over this limit will be taxed when you start using it. No withdrawals can be made until age 55, rising to 57 by 2028 and 58 by 2044.

The child’s parent or guardian will need to set up the pension, but once opened, grandparents, friends and relatives can make contributions into it. The maximum that can be paid into a child’s pension is £2,880 per year.

You could pay in a lump sum all at once, or spread your contributions out across the year by investing a smaller amount each month. If the maximum annual contribution is made, the state will top it up by £720, making a total contribution of £3,600.

Investment account

For tax reasons, this approach may best be suited to grandparents. Grandparents can set up a designated account for a grandchild and invest a capital sum in it. The grandchild’s initials are put in the designation box when the account is set up, creating a bare trust.

As a result, HM Revenue & Customs will view income and gains from the investment as being attributed to the minor, who will have their own Income Tax and Capital Gains Tax allowance, so there will be no tax implications for the grandparents.

Any money invested in this way leaves the grandparents’ estate seven years after it has been gifted. At 18, the grandchild is legally entitled to the money, however, and can use it however they see fit – which may not necessarily be for education.

Many parents and grandparents want to set up their children or grandchildren to enjoy a secure financial future. Yet paying down student debt is not necessarily the best option if they have a spare capital sum to invest. They could also consider helping their children or grandchildren to save towards a deposit for a property or start a pension for them so that they have security in later life.

Give a festive financial gift this Christmas

Time is a powerful ally of all investors, so where you are investing on behalf of children, you start with a great advantage – the power of compounding as profits are re-invested year on year. If you would like to discuss the options available to you, please contact Touchstone Investment Advisers on 0203 026 4074 or email info@touchstone-uk.co.uk. We look forward to hearing from you.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.