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

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.

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.