How to invest in your children's financial future.
PARENTS proud of their children's A-level results this week will remember how far they have come and will perhaps consider how expensive it has been.
While the cost will vary wildly, recent figures from Aviva suggest that, on average, parents spend around PS35,000 on their children - by their fifth birthday! So of course by the time the child has concluded their A-levels, this figure could be much more.
Later milestones necessitate further financial resource such as going to university, with higher education a first step for many into personal debt. It is touted that the generation Z - those born between 1995 and now - will be more worried about money than the previous generation, because of the 2008 financial crisis, one of their childhood's major shocks. Thus, the importance of early financial planning is clear to ensure your children's secure financial future.
Turning back to the Aviva study, the good news is 52% of parents had opened savings accounts for their under-fives and/or a Junior Isa (Jisa). When children become taxpayers, the Jisa investments are then transferred into a full Isa account, with the continued benefits of being held in a tax shelter. In the 2015-16 tax year, the Jisa limit is PS4,080.
Once this transfer happens, the teenager can do what they like with the money. At 18 this may be a bit premature and so for tighter control over the use of funds, the alternative is to set up a trust for your child. Given that this affords the parents or grandparents extra control, it is worth considering and the costs don't have to be prohibitive.
Pensions have recently become an increasingly important, and certainly more flexible, savings vehicle as the reforms implemented by the Government allow funds to be passed down to any beneficiary, rather than simply the spouse or dependents. This allows the opportunity for pension funds to now be utilised for planning down the generations.
While rarely advisable in isolation, in terms of contributing to a child's own pension, parents and grandparents can make contributions into a pension for children up to a total value of PS3,600 a year. The pension contributions benefit from tax relief even though the child may not be a taxpayer, which means that only PS2,880 has to be paid in to achieve the PS3,600 maximum.
Investing early in your children's lives usually involves putting money in the stock market to build a useful portfolio. Beware, however, that even though the child may not be earning and so not paying income tax, any investment or savings income arising from parental gifts that is over PS100 a year is assessed on the parent's rate of income tax unless the investment is a Jisa.
This is to stop parents avoiding too much tax in their own right through placing money in the child's name. Grandparents who invest for their grandchildren are, however, not caught by the same rule.
Turning to long-term tax planning, there are certain tax breaks that allow family members to gift to one another, fixed and in some cases, significant sums per year and have these gifts deemed to be immediately outside of the donor's estate for inheritance tax purposes. Fall on the wrong side of these rules and the gift could ultimately result in a 40% tax liability.
All that said, there are many factors to consider, not least that no one knows what the future holds, and giving away money now that you might need in the future could be very costly. So always think carefully and seek professional advice.
Some adviser firms aren't interested in lower-value clients and, of course, children usually fall into this category. At Lowes Financial Management we're different as we take a longer-term view and look after many generations of the same families. Your wealth is your family wealth - the right decisions today can positively impact your family for generations so make sure you put your family finances in safe hands.
Lowes Financial Management, |Holmwood House, Clayton Road, Jesmond. Newcastle, tel: 0191 2818811