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.

 

Pensions – Lifetime Allowances – Reductions and Protection

Pensions planning for higher earners is likely to become extremely topical in the balance of 2013 and early 2014.  

 

In previous Chapters Financial Blogs, we have referred to the forthcoming reduction in the Pension Annual Allowance from £50,000 to £40,000 from tax year 2014/2015. Another important allowance in respect of pensions is the Lifetime Allowance (LTA) which is the total deemed benefit amount held by an individual in all pension arrangements above which tax charges would apply.

 

I have looked at a few of the points you might want to consider below.

 

Lifetime Allowance (LTA) – Limits

 

The Lifetime Allowance was introduced on 06 April 2006 through legislation. The Lifetime Allowance (LTA) is currently £1.5M (tax year 2013/2014) and is due to reduce to £1.25M at the beginning of the new tax year, from 6 April 2014. This limit has already dropped from £1.80M (tax year 2011/2012) and the apparent trend may continue as the Treasury tries to garner more taxable funds. There is no guarantee this is the case and only time will tell.

 

Tax on Excess above LTA

 

If individuals’ total benefits accrued are greater than the Lifetime Allowance (without suitable protection), then a punitive tax charge would apply on the excess benefits of 55%, if taken as a lump sum, or 25% if taken as taxable pension income. Therefore, it could be more beneficial to remain within the Lifetime Allowance limit and divert any disposable income to other tax-efficient wrappers / products.

 

HMRC Consultation

 

It should be noted that HMRC have launched a consultation paper (June 2013) on possible smaller changes to the application of the LTA and this can be found here:

 

https://www.gov.uk/government/consultations/pensions-tax-relief-individual-protection-from-the-lifetime-allowance-charge

 

Please note that this is a consultation and we will endeavour to keep our readers posted on any agreed changes.

 

Chapters Financial is not responsible for the content of external website information.

 

Protection of Benefits

 

The government is allowing individuals to protect deemed pension benefits which have accrued greater than £1.25M prior to 06 April 2014. Confirmation and the documentation to achieve this should be available from autumn 2013.

 

This protection will be known as Fixed Protection 2014 (or FP14) and Individual Protection 2014 (or IP14). Each protection offers a different type of pension protection to the individuals’ benefits and are applied for at different times.

 

·         FP14 must be applied for prior to 06 April 2014.

 

·         IP14 can be applied for in a 3 year window from 06 April 2014.

 

It should be noted that IP14 is still in the consultation phase and has not been passed as legislation.

 

Defined Benefit Schemes

 

It is worth noting that Defined Benefit schemes (such as a Final Salary scheme) are valued, against the Lifetime Allowance, using a factor of 20, plus lump sum where applicable.

 

As an example, any pension income benefit accrued over approximately £62,500 pa (with no tax free cash) could breach the new reduced £1.25M Lifetime Allowance (2014/2015).

 

You should seek individual advice on this topic if it affects you.

 

Professional Advice

 

Whenever changes to pension legislation are due to come into force then considered financial planning should be sought from professional independent financial advisers.

 

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

 

No individual advice has been provided in the text of this blog. You should seek independent financial advice (IFA) in 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.