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 ).

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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

Extra! Extra! Read all about it! Topping up your State Pension: is it worth it?

Financial planning and retirement planning can get complicated when coming to the right solution for each individual. The new flexibility introduced in the Budget 2014 is very welcome, however it is very important not to forget the basics, such as the State Pension available to each individual.

Normally, as part of our standard process, we ask individuals to check their State Pension benefit accumulation to ensure that the correct value is being achieved. This may not always be the case and it is important that allowances, such as the Home Responsibilities Allowance, are accounted for. This can be achieved by using a BR19 State Pension Forecast form, which may be found here: https://www.gov.uk/government/publications/application-for-a-state-pension-statement-form-br19-interactive-pdf or by going online to check the value of future benefits here: https://www.gov.uk/calculate-state-pension

It should be clear that in most cases there is real value in maximising the index-linked income from the State Pension, and reviewing the benefits, in our opinion is usually worthwhile (not in all cases), especially if you have the opportunity to increase their value.

Extra! Extra! Read all about it!

From October 2015, pensioners will be able to ‘buy’ up to £25 a week of extra State Pension. This option will be open to anyone who reaches State Pension Age before April 2016 – in other words, women born before 6 April 1953 and men born before 6 April 1951. The scheme aims to compensate the millions of pensioners who will miss out on the new flat-rate State Pension, which will come into effect from April 2016 and will pay around £155 a week.

If you qualify, there is only a short window of opportunity to increase your State Pension under this new top-up scheme: the scheme will run for 18 months, from 12 October 2015 to 1 April 2017.

Is this a new top-up scheme?

Yes, although there’s already a system whereby you can top up your basic State Pension. You currently need 30 years of full National Insurance contributions to qualify for the full basic State Pension. If you’ve accrued fewer years, you can make a lump-sum payment to increase the amount of basic State Pension you will receive on retirement.

The new scheme doesn’t replace this system and it’s important that you check that you have full entitlement to the full basic State Pension before you subscribe to the new top-up scheme. This is because your money will buy you significantly greater benefits under the existing scheme – for example, a sum of £890 would currently buy a 65 year old £4.64 a week of extra basic State Pension, whereas under the new scheme the same sum would boost your income by just £1.

What benefits can I ‘buy’ extra?

You can choose to top up your State Pension by between £1 and a maximum of £25 per week. How much you’ll need to contribute depends on how much extra pension you want to get each week and how old you are when you make the contribution.

For example, you are 68 years old in October 2015. You decide that you want an extra £5 per week (£260 a year) on top of your pension. The cost of an extra £1 per week for a 68 year old is £827, so you multiply £827 by 5. Therefore, you’ll make a lump sum payment of £4,135.

An online calculator is available at https://www.gov.uk/state-pension-topup . This will give you an idea of the cost and value of buying extra State Pension income at your current age.

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Does the new scheme offer value for money?

It could, for many people. The scheme works like an annuity, in that you are buying a guaranteed (and index-linked) income for life with a lump sum payment. Thus, your investment will only pay off if you live long enough to recoup the cost of buying the income and subsequently start earning a ‘return’. So those in good health should benefit from topping up their State Pension.

The maximum additional benefit of £25 a week costs £22,250 for a 65 year old. This is equivalent to an annuity rate of 5.84% - significantly higher than the current market rate of just over 3%. The return is higher still for older pensioners – a 70 year old will pay £19,475 for an additional income of £25, which is equivalent to an annuity rate of 6.67%.

Spouses and civil partners will also be able to inherit 50% of the top-up on the death of the pensioner, and the resulting income payments will remain index-linked.

The scheme may offer poorer value for money for a range of individuals:

• Single pensioners – as they have no spouse/civil partner to inherit 50% of their top-up
• Those with shorter life expectancies – as they may not live long enough to benefit from their investment
• Those who need access to their capital in retirement – rather than committing their lump sum to buying an income

What are the alternatives?

There are alternatives and each individual case is different. This is where high quality financial planning advice can help you understand the options and to allow appropriate decisions to be made as to the ways clients and enquirers use their capital to gain income.

The Chapters teams in Guildford and Woking are well placed to advise you on the impact of current and future changes to pensions legislation on your finances. 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 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.

What’s new about the NISA?

All Individual Savings Accounts (ISAs) will become New ISAs (NISAs) from 1 July 2014. This applies to all existing ISAs and new accounts opened after 1 July. The new name reflects the significantly increased limits and flexibility that will be available to account holders following the Budget 2014. Some use this medium as a savings vehicle for retirement and have campaigned to see the limits available under this tax efficient savings vehicle extended.

New limits

The current limit for ISA investment is £11,880 for the new tax year 2014/2015. From July, the annual limit will increase to £15,000 – the biggest ever increase to ISA limits. It is planned that this investment limit will then rise by inflation every year going forward.

You won’t be able to invest the full £15,000 ISA allowance until July. Between 6 April and 30 June 2014, the total amount you can pay into a Cash ISA is £5,940. If you have a Stocks and Shares ISA, you can also pay into that account, but the combined amount you pay into your Cash and Stocks and Shares ISAs must not exceed £11,880.

New flexibility

When the new rules come into play, you will be able to split the amount you pay into an ISA between a Cash NISA and a Stocks and Shares NISA as you choose – up to the new overall annual ISA limit of £15,000. Previously, it was only possible to save up to half the overall ISA subscription into a Cash ISA. This should be a particularly valuable feature for those who are keen to protect their capital from exposure to movements in the stock market.

It will also be possible to transfer between cash and stocks and shares ISAs (either way) to meet your needs and attitude to investment risk. If you want to transfer funds from a Stocks and Shares NISA to a cash NISA after 1 July, different rules will apply depending on when you paid the relevant amounts into your Stocks & Shares ISA. If it was in the current tax year (i.e. after 6 April 2014), you must transfer these savings as a whole. Any savings related to earlier tax years can be transferred to a cash NISA in whole or in part (but you’ll need to check with your ISA provider that they allow part transfers).

New for juniors

If you are aged between 16 and 18, you can hold an adult Cash NISA but cannot open a Stocks and Shares NISA. From 1 July 2014, you will be pay up to £15,000 into your Cash NISA for the tax year 2014/15. This equates to an increase of £9,060 in the amount that a young person can save in an ISA account – a significant step forward in encouraging a savings habit in the younger generation.

For those up to the age of 18, the Junior ISA limit has increased to £3,840 in this tax year. One possible way of saving for university costs.   

Old ISA providers…

If you’ve already paid into a Cash ISA account in this tax year, you may find that the terms and conditions of your account don’t allow further amounts to be added when the new rules come into play. However, you can make additional payments by opening a Stocks & Shares ISA account, or by transferring your Cash ISA to another provider that will allow additional amounts to be added.

Nicer ISAs

This new flexibility will give you far greater freedom of choice in how you shelter your capital from tax. If you don’t want to brave the vagaries of the stock market, you will now have the opportunity to save a significant amount more cash in a tax-efficient manner. If you’re keen to take more of a risk, there’s a whole world of investments out there – and the Chapters Financial team would be pleased to advise you on those that will best meet your financial objectives and your attitude to risk. 

Don’t forget the additional opportunity (for those eligible) introduced in the Budget 2014 of the Pensioner Bonds due to be released in early January 2015 which will also offer attractive savings options for amounts up to a total of £20,000.

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 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.