Are Your Children's Savings Invested Appropriately

How do you save for your children’s future, and are you saving with a particular goal – such as university fees – in mind? If so, are the funds invested in assets appropriate to the length of time until the money is needed?

With the current geopolitical situation causing stock market volatility, parents and grandparents may well be concerned over where best to save for the younger members of the family. However, it is important to bear in mind that most investments made for children are for a term of 10 years plus, and therefore investing in stocks & shares could well be a suitable route to take, on the basis that the investment is regularly reviewed.

It is interesting to note that three quarters of the £578 million subscribed to Junior ISA (JISA) accounts in 2013-14 is invested in cash, with only a quarter subscribed to stocks & shares arrangements. Although the interest rates offered on cash JISAs are superior to those offered to adults, with the majority currently paying between 2% - 3.5% gross AER per annum (source: Money Advice Service), any gains made are at risk of significant erosion by inflation over time. Investing in ‘real’ assets such as stocks & shares can help to protect against inflation and improve the overall return over time (not guaranteed).

Junior ISAs – a popular and tax-efficient way to save

JISA accounts have been available since 1 November 2011 to children under the age of 18 who do not own a Child Trust Fund (CTF) account (CTFs were available to eligible children born on or between 1 September 2002 and 2 January 2011).
According to recently published Government statistics, JISA account openings rose by 46% in the tax year 2013/2014, the second full financial year since the JISA took over from the CTF. £578 million was subscribed to JISA accounts in 2013-14 (source: HMRC ISA Statistics 2014 - http://tinyurl.com/n4l86sx ).

Chapters Financial is not responsible for the content of external websites

 

We expect this figure to continue to rise, with a boost from April 2015 when parents will be allowed to switch funds currently held in CTFs to JISA accounts. It is likely that JISA accounts will prove more flexible and better value than the older CTF arrangements and we would encourage parents to seek advice on the new options available.

Are you taking enough investment risk?

In the current tax year (2014/15), parents and grandparents can invest up to £4,000 in a JISA. Even if you don’t save to this limit, and choose to set aside a small amount each month, this can add up to a substantial amount over an 18 year timescale if invested appropriately.
Understandably, some people will not be comfortable with exposing their savings on behalf of their children to stock market volatility. However, given the long time period over which money is likely to be invested, sheltering the funds in cash may prove counterproductive. An (example) 18 year period provides enough time to absorb short-term stock market movements and investments in stocks & shares offer the potential for real capital growth (not guaranteed).

Maximising the tax efficiency of saving for children

Children are entitled to the same income tax personal allowance as adults (currently £10,000 in the 2014/15 tax year). Most children won’t have ‘earnings’ as such, so this allowance is applied to the income they may receive from sources such as deposit savings or investments. If the return the child receives in a tax year is less than the personal allowance for that year, no tax will be due.
An important point to watch is that if you give your children money outside a tax-efficient investment such as a JISA, and this generates interest of over £100 gross in a tax year, the whole amount of this income will be taxed as if it were your own income, at your highest marginal rate.

This limit applies to parental gifts only, not to gifts from other family members. With Christmas approaching, it may be a good time for grandparents to consider gifting money to their grandchildren, either into a JISA if contributions have not been maximised, or into a savings account or other arrangement. This gifting would have the added advantage of using the grandparents’ annual gift allowance, if not already used. Each individual is allowed to give away gifts worth up to £3,000 in total in each tax year and these will be exempt from inheritance tax from the date of the gift. Any unused part of the annual exemption can be carried forward to the following year.

Summary

If you would like support and advice on saving for your children or grandchildren’s future and maximising the tax efficiency of gifting and investing then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own family situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.



Vicky Fulcher
Trainee Financial planner

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

Independent Scotland. The (close) result is in!

I have watched the debate about the possible divide of our United Kingdom union with interest over the last few weeks. Let's face it, media coverage has made it unavoidable, but from a fiscal perspective with good reason. I remain surprised by the panicked 'surprise' of our senior politicians of all denominations that around 10 or so days before the crucial Referendum vote they realised that this was going to happen and was not just an idle threat.

Having now worked in the UK financial services world for 29 years, I started in the mid-80's with the introduction of 'Yuppies' and excess before experiencing my first economic recession at the end of that decade. What was instilled in me from this tender age was the strength (and at the time power) of Sterling as a global currency. I maintain that sadly we as a nation underestimate the real value of Sterling (or GBP) in the new digital-by-default era that we live in. This is especially relevant when we view the slow if not stopped progress of the Euro as a currency example.

Economies run in cycles. As I suggested in my book, The Recession is Over, Time to Grow, produced in the late spring of last year, an economy is like carrying a bucket of water. When it sloshes one way (prosperity), it will surely slosh the other way on the rebound (recession). The cycle is usually (not guaranteed) 10-12 years and this might point to a prosperous decade ahead with economic turbulence in the early years of the 2020's.

The arguments and convictions proffered by the 'Yes' campaign were strong and cannot now be ignored by Westminster. With Scotland now secure (for the time being) in our union, I have no doubt that this has whetted the appetite of other regions to request additional and new autonomy. The physical landscape of the UK will not change, but the economic outlook for us all may look very different.

Yours Aye

Summary

If you would like to consider the points noted above further then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further with your pension enquiries. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own individual situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.

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

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

Back to school, back to school fees

Ah! The start of a new school year – the joys of trying to gather together all the sports kit and school books that you stowed away in July thinking that September was weeks away. There’s nothing like last-minute preparation. Great for uniforms, but not for planning school fees.

If you are considering independent / private schooling as a future (or current) option for your children, achieving careful financial planning as early as possible will help you to gauge affordability, maximise your options for fee payment and could save you substantial amounts of money in the future. If your children are already at private school, you will no doubt have had school fees on your mind way before the start of the new term.

School fees, pupil age and inflation

The Independent Schools Council (ISC) Annual Census 2014, which is based on data gathered in January 2014 from the ISC membership of over 1,250 independent schools, states that the overall average termly fee across the membership is currently £4,998 (excluding nursery fees). The average boarding fee is £9,596 per term and the average day fee is £4,241 per term. Fees will of course vary depending on factors such as geographical location and reputation, and the differences can be extreme.

It is also important to bear in mind that school fees do not remain level. The amount you pay will increase in two ways. Firstly, the fees will increase by school year/pupil age – i.e. you will pay more for a child in Year 6 than for a child in Year 2. Secondly, fees across the board are likely to increase every year by far more than inflation.

ISC figures suggest that the cost of sending a child to private school has risen by approximately 40% since 2007. In its Annual Census 2014 the ISC notes that the average fee across its member schools (excluding nursery fees) has risen by 3.9% from January 2013. This is the lowest annual fee rise since 1994. However, it is still significantly higher than the rate of inflation over the same period which was 1.9% as measured by growth in the Consumer Prices Index/CPI (source: Office for National Statistics).

The ISC Annual Census 2014 may be viewed here:

http://www.isc.co.uk/Resources/Independent%20Schools%20Council/Research%20Archive/Annual%20Census/2014/ISC_Census_2014_11Apr14%20v2%20(2).pdf

Chapters Financial is not responsible for the content of external websites

School fees are usually not inclusive of extras

When parents try to assess the affordability of private education, or work out a savings plan for future fees, the figures used are often the basic fees quoted in the prospectus or on the school website. The ‘extras’ are often left out of the calculation and can bump up the cost considerably. From personal experience, the main potential areas of additional expenditure are as follows:

• Uniform: the biggest single outlay takes place when the child joins a new school and requires a whole new set of uniform and sports kit. Bought new, it can be cripplingly expensive, especially if the school has a dedicated shop from which all uniform must be purchased. In this situation, an initial outlay of £400 would not be unexpected. It is worth checking whether any generic items can be bought through other sources and it’s definitely worth looking at the school’s second-hand uniform shop. It’s also important to bear in mind that many private schools change the uniform requirement or design fairly regularly, so you should be prepared to replace items of clothing /sports kit that are ‘out of date’. Particularly frustrating when the ‘old’ kit still fits…
• Out of hours care: many schools now offer wrap-around care (e.g. breakfast and after-school clubs), which are particularly useful where the parent(s) work full-time. However, this service comes at a cost, which is often forgotten in budget planning. As an example, the cost of putting a Year 6 child in one local private school into breakfast and after-school clubs every day (care from 7.30am to 6.30pm) would currently amount to nearly £700 per term.
• Trips: in many cases, the cost of outings and residential trips offered by private schools is charged on top of the basic fees. It is sensible to plan in another £100-£200 per term to cover these eventualities, and potentially more for senior school children.
• Lunches: some private schools charge extra to provide lunch, whereas for others this is a service included within the basic fees. If lunch is not included, this could add in the region of a further £100 per term to the bill.
• Extracurricular lessons and clubs: there will often be a wide range of additional activities available, from music lessons to sports clubs. Again, most of these will cost extra - for one-to-one piano lessons alone, for example, I would suggest factoring in another £120 per term.

 

It’s easy to see, therefore, how the ‘extras’ can mount up – for a child entering a new school and requiring wrap-around care five days a week, the additional costs over and above the basic fees could well amount to over £1000 in the first term. 

Funding 

 

Early preparation is key. Paying for school fees out of net income (after-tax income) can have a significant impact. For example, a year’s school fees of £15,000 would be £25,000 before tax for a 40% taxpayer. However, with some forward planning, this situation can be at least partially improved. Strategies to consider include:

 

• Saving / investing: As early as possible. ISAs (or New ISAs/NISAs as they are now known) are a tax-efficient way to put aside money every year for future private education commitments. The NISA allowance for the 2014/2015 tax year is currently £15,000 and this can be invested in stocks and shares, cash or a combination of the two, according to your needs and your attitude to risk. Obviously the earlier you start saving, the more you can accumulate before school fees begin.
• Scholarships and bursaries: It is sensible to investigate the availability of scholarships and bursaries. Bear in mind, though, that bursaries are generally means-tested, although every school will have a different system in place. Scholarships are awarded for prowess in a particular academic or other area, such as music or sport.
• Family help: It may be the case that grandparents or other family members are willing to help out with school fees. If this is the case, a ‘bare’ trust arrangement could be a tax-efficient way for them to provide support. A ‘bare’ trust can be set up by anyone for a specific child or children. The trustees will withdraw money as required to pay towards the school fees. Gifts to the bare trust are usually treated as Potentially Exempt Transfers (PETs) and will usually fall out of the estate of the donor for Inheritance Tax purposes after seven years.

 

Summary 

 

Private school fees can be a significant drain on your household income and advance planning is the key to assessing affordability and minimising the financial impact as far as possible. If you would like support and advice on planning for school fees then please do not hesitate to contact the team at Chapters Financial, who will be able to help you further. No individual advice is provided during the course of this blog. If you would like to receive further information regarding your own family situation and circumstances, please contact the Chapters Financial team in either Guildford or Woking.  

 

 

Vicky Fulcher Dip PFS

Trainee Financial Planner

  

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

 

 

Active or Passive Funds, which is best?

Investing funds for your future can prove to be a minefield for those who do not take suitable advice. Chapters Financial hope that through our informed processes, we are able to educate enquirers in investment planning and what can be achieved and possibly, more importantly, which investment styles can be used. As an example, some investors are not aware of the difference, or even the existence, of active and passive investment funds. You may have spotted the long list of funds listed in the financial sections of the weekend newspapers and the Broadsheets during the week.

So what are these active and passive funds and what might you want to consider?

• What do they do with your money?
• How do they differ?
• How can their performance be measured?

Active Fund examples

Active funds are, as the name suggests, actively managed by professional fund managers who make decisions on the individual holdings within the overall fund.

Invariably, they will be buying, and selling, different shares / gilts / commodities / etc. based on what they believe to exhibit the most, or least if selling, value at the time within their chosen sector. It could be suggested that you are effectively buying the expertise, skill and experience of fund manager’s team you are investing in, along with the assets of the fund. You are paying for this skill, expertise and experience within the fund’s Annual Management Charge (AMC/ known as On-going Charge in many investments). Investments are usually made for a return and the payback you wish to see for your decision is that your investment return is good (and some ‘benchmark’ their return against a corresponding index for comparison purposes). This benchmarking should demonstrate that the fund, and correspondingly the investment fund manager, is outperforming its peers (or not) within the marketplace.

Passive Fund examples

Conversely, passive funds are not (as you may have already guessed by now) actively managed.

They usually aim to track an chosen index, or benchmark, by being invested in a ‘basket’ of holdings which are designed to closely replicate the index, or benchmark, to varying degrees of accuracy depending on the type of passive fund. This ‘basket of holdings’ (usually unit holdings) is not changed unless the index, or chosen benchmark, is changed. One example of an index is the FTSE100 which is comprised of the top 100 leading companies listed on the London Stock Exchange (LSE). A FTSE100 Tracker Fund will buy shares in the FTSE100 companies and it will be unlikely to amend the basket of FTSE100 company shares unless certain companies fall in and out of the FTSE100 list. Due to less analysis, fewer transactions, minimised administration and reduced manpower required for passive funds the Annual Management Charges (AMC) tend to be lower than the Active funds noted above.

Benchmarking

Some investors prefer to have a measure to judge performance of their fund against the area they are targeting, such as Growth or a Stock Market, such as the FTSE, as examples. For Private Investors, one reasonable tool that can be used is APCIMS (Association of Private Client Investment Managers) FTSE benchmarks. There is a range available and a link to these can be found below:
http://www.ftse.com/Indices/FTSE_APCIMS_Private_Investor_Index_Series/index.jsp

Which to go for?

One question often posed is ‘why not just buy passive funds only to keep costs down you may ask?’
Although the costs of fund management are important and should be considered carefully, the answer is reasonably simple. If you are trying to achieve better returns than a chosen index or benchmark, then passive funds are highly unlikely to ever achieve this index return. Why? Due to the fact that the index, or benchmark, will not be reduced by the Annual Management Charge made to your fund and therefore the index return should always be greater.

It could then be suggested that the higher charges applied by an actively managed fund will require the investment to work harder to achieve the same return achieved in a passive fund/investment. There is some mileage in this argument, but without the constraints of an index to adhere to, this usually gives the manager a greater range and flexibility of investment choices. Some would argue that smaller funds can be more agile than larger funds, but without being tied to a (potentially) restrictive index, the scope of the manager for investment and, most importantly, returns should be increased.

Chapters Financial usually prefers actively managed funds, however a mixture of both active and passive funds can be used to great effect to generate capital growth (or income or both) depending upon the clients risk profile, objectives and timescale. Benchmarking, as noted above, may be a way of way of helping measure the success of this investment planning strategy.

Investment is about clients’ needs and desires for their money and its future. Any financial/investment planning should be based on your objectives and attitude to investment risk. For reference, an Investment Risk Schedule can be found on the Chapters Financial website here.

As you would expect, no individual investment/planning advice has been provided during the content of this Blog. This is because each client’s needs are individual and so is their planning. Chapters Financial Limited would be pleased to help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.

Past performance is not a guarantee of future performance. Fund values can fall as well as rise. Chapters Financial is not responsible for the content of external Website links.

Simon Hewitt BSc (Hons) DipPFS, Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.