More opportunities for tax-efficient saving. Don't miss them if they fit your long-term plans.
In the beginning .........
...... there were Child Trust Funds. Introduced in 2002, phased out in 2011, they supported the notion that saving for children should be encouraged. Now (2019) we have Junior ISAs and SIPPs and stakeholder pensions for children. There are two good reasons for considering these, one financial and one psychological:
- If you are on a path where you expect to die with a financial surplus that will pass to your children or other young family members, doesn't it make sense to put some of that money away now in tax efficient savings wrappers?
- If you are a parent or guardian trying introduce savings habits amongst all the other life skills you must encourage, can there be anything better than giving them a personal interest in the matter?
Junior ISAs are just like senior ISAs, but with an annual limit of £4,368. Parents/guardians must set them up but anyone can contribute. Good grandparent bait. The children can't touch them until they are 18. Then they can roll the fund into a senior ISA or take the cash.
The bad news? It's the child that makes that decision. Do you want to make a gift that may end up fuelling a drug habit or a predilection for idleness?
Actually there's no such thing. More correctly, children are eligible for the same types of pensions as adults, including SIPPs and stakeholder pensions. Under current rules up to £2,880 can be saved each year into a tax-free wrapper and will be topped up by the government at 25% (£720 on £2,880).
The bad news? Yes, it is a pension - can't be touched until age 55. So it's inflexible - not much use for buying the first house then, or paying for all those other unexpected disasters that can affect a life. It's also dependent on political whim - could be cancelled tomorrow (that's true of all long-term tax concessions of course).
But the good news: tax efficiency and compounding make this an enormously powerful pension mechanism. If the fund is invested in risk assets such as equities, and earns let us say 4% per annum real return, a maximum of £51,840 (=18 x £2880) invested will turn into £410,000 when the 'child' is 55. (And remember that is 'real' money - i.e. money with today's spending power). If the same money is invested 'normally' and the fund income is taxed at 40% throughout its life it accumulates to just £160,000.
Like all pensions you have to find a wrapper - say a stakeholder pension or a SIPP. The wrapper will have fees and the funds the wrapper may try to put you into will have fees also.
All the issues around choosing investments and managing funds apply. If your imaginary fund in the previous section has annual fees of 1% per annum the return (to you) reduces from 4% to 3% and your £410,000 terminal value reduces to £260,000. Yes, really!