From capital growth to income. The possible life phases of Investment & Savings

Everybody tends to move through their personal life phases over time. It would be natural for their money to do the same as their needs develop and evolve.

This usually requires some financial planning and I have considered below some of the issues that might need to be considered through the phases of a lifetime.

Starting the savings process 

Capital accumulation usually needs (amongst others) time and money. This might sound a bit obvious, but the sooner you can start saving the better, and the more you can put in at the earliest points usually creates the most capital (not guaranteed ) for the future. This might start with smaller amounts in your early working years and build as the pressures of household and family expenses come under control and household income rises as your career develops.

The desire to save can be fuelled by any number of objectives, from buying a house, to saving for a wedding, to paying for school fees, to name just a few examples. It might be simpler than that, just paying for this year’s summer holiday.

Accumulation phase / Capital Growth 

As you move through your working life, and savings are invested, many will focus on capital growth as the objective. They have no real need for additional income and their investment objective is capital growth, with any income produced being re-invested accordingly.  Savings might be invested in tax efficient plans, such as ISAs and pensions, and also balanced across spouses/ partners to ensure that annual allowances are maximised where possible. This last point also has the potential to help balance income using income tax allowances in later years, such as retirement.

Attitudes to investment risk might be balanced or aggressive in this phase to endeavour to maximise returns, accepting that this is likely to import volatility in returns. More information on investment risk (and notes on volatility) can be found on our website here. The important issues of volatility can be considered further at our Investment Risk Scale here.

Income Phase 

It is possible that at the end of a working life (and usually the end of the accumulation phase), savings and investments would be re-balanced with the emphasis being focussed on income generation (rather than capital growth previously targeted) to boost income in retirement.  Attitudes to investment risk should also be checked at this time to re-test tolerance to risk and capacity for loss (ability to withstand falls in the value of the investment and/or reductions in the amount of income it can generate). Some may want to reduce their previous investment risk ratings, becoming less accepting of significant volatility in the capital they have accumulated.

This income phase may sometimes be deferred if not needed, being initiated when higher costs are incurred in later life, such as Long Term Care. More information on this topical point can be found on our website here.

Summary 

As the notes above indicate, a regular review of the allocation of your investment assets is worthwhile, partly to ensure that they continue to match your attitude to investment risk and partly to ensure that they match the life phase (and its requirements) that you reach. Past performance is not a guarantee of future performance.

No individual advice has been provided in the content of this blog. For individual advice on your pensions, savings and investments needs, please contact the team at Chapters Financial on 01483 578800.

Keith Churchouse FPFS
Director
Chartered Financial Planner, ISO22222 Certified Financial Planner Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

How to save for your Children’s future

We are often asked by our clients what is available for them to start saving for their children’s futures? The question is a valid one as they want to ensure their children have as good a start as possible. However, what many people don’t realise is that if a parent gives money to a child, and that money generates more than £100 per year in income, then the income is taxed on the parent’s marginal tax rate and not the child’s.

 

Children, the same as adults, have a personal income tax allowance of £9,440 in the current tax year (2013/2014) which is the amount they can receive as income before income tax is liable. So what are the options available to parents? I have given brief descriptions below of some of the options which could be utilised. This is not an exhaustive list, but provides some ideas for your consideration.  

 

Child Trust Funds

 

These were available to children who were born between 01 September 2002 and 2 January 2011 and who lived in the UK. The Child Trust Fund (CTF) is a long-term tax free account which allows £3,720 a year to be added into the account. The money belongs to the child, however the fund cannot be accessed until the child reaches 18 years old.

 

There are 3 types of Child Trust Fund accounts: 

• Stakeholder (certain rules apply, such as you must invest in more than one company and move to lower risk investments when the child is 13)
• Share Account (Equity based fund)
• Savings (Deposit based fund)

The Government is currently considering whether to allow Child Trust Funds to be converted into Junior ISAs (described below) but this is purely at the consultation phase and has not been passed into legislation. There is no guarantee that any changes will be made.

 

Junior Individual Savings Accounts (JISAs)

 

The Junior ISA effectively replaced the Child Trust Fund and was initially made available from 01 November 2011. The child is able to own a Junior ISA if they are under the age of 18, live in the UK and were not entitled to a Child Trust Fund (CTF). Any income or gain is free from tax other than the 10% dividend tax credit produced by equity holdings which cannot be reclaimed.

 

The account can be opened by the child if they are at least 16 years old or by the person with parental responsibility. The account is owned by the child but operated by the parent / guardian until the child reaches the age of 16. The money cannot be accessed until the child reaches 18. When the child reaches the age of 18 the Junior ISA is automatically converted into a full adult ISA.

 

Similar to adult ISAs, there are two types of Junior ISA – a Cash Junior ISA and a Stocks & Shares Junior ISA. You can choose either type, or both, but the combined maximum annual contribution is limited to £3,720 (2013/2014).

 

Pensions

 

Any UK resident is allowed to contribute 100% of their earnings or up to £3,600 (gross), whichever is greater, in each tax year and receive tax relief at their marginal rate up to a maximum of £50,000 (2013/2014).

 

Therefore, the majority of children could, as an example, have contributions of up to £3,600 gross per year into a pension fund which grows tax efficiently. This means that to receive the total maximum gross contribution of £3,600 the money invested on behalf of the child would only have to be £2,880, with the remainder (£720) being paid by the government in the form of tax relief at 20%.

 

It should be noted that the fund which is accumulated within a pension cannot be accessed until the age of 55 (under current legislation). From the age of 55, the fund can provide a tax-free lump sum of up to 25% and the balance providing a taxable income.

 

Summary

 

These options could be very useful in the early financial planning of any child’s future, however professional financial advice should be received before implementing any savings for children. There are other tax efficient savings options available, such as Premium Bonds, and it is sensible to consider these before finalising any savings plans you have for the future.

 

If you would like to know more about this area of financial planning, your children’s tax allowances, and the different types of accounts available to children then please contact the team at Chapters Financial Limited on 01483 578800.

 

No individual advice has been provided in the text of this blog. We would urge you to seek independent financial advice (IFA) on your own individual circumstances and needs.

 

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.