Every parent wants to care for their children in whatever way they can. We want them to thrive, prosper and most of all be happy. One of the most effective ways to safeguard their future prospects is to set aside some funds to give them a financial step up in adulthood. Whether it goes towards a university education, a wedding or a first house, with some careful investment planning now you can put the funds in place to support their goals later.
Nurturing a financial nest egg for you children requires some careful investment planning. If you’ve already taken your first tentative baby steps towards researching your options, you’ll no doubt be all too aware that there are many investment products for children available. You’ll also probably want to get your head around the tax implications of these products. Not to mention consider when your children should access those funds.
There are lots of things to think about, in fact. But fear not, Acumen is here to help.
What to consider when investing for children
Investing for children is the best investment you’ll ever make. Much like any other investment decision, there are certain considerations to weigh up first. Like why, when and for how long you’d like to set aside your money and, of course, the level of risk you’re willing to absorb. All of these factors combined will have a major bearing on the type of investment product you choose.
As a quick rule of thumb, the shorter your preferred timescale, the greater your focus should be on cash and other lower risk investments. However, if you’re taking a longer term approach spanning anything more than five years, then shares or property are a better choice. Of course, there is more inherent risk with these types of investments, but you’re likely to yield better returns in the longer term.
Tax implications of investing for your children
Believe it or not, children are not exempt from tax – even babies. Just like adults, children are entitled to a certain amount of income before it becomes taxable. The personal allowance for children is currently £12,500 in 2020/21. Anything over and above that threshold will be subject to a tax bill from HMRC. This is precisely why it’s so important to be prudent when investing for your children.
Thankfully, there are a number of tax efficient investment options to help you make the most of your savings.
- Junior individual savings account (JISA) – A wrapper for tax-free savings of up to £9,000 in 2020/21.
- Individual savings account (ISA) – Children aged 16 or 17 can save up to £20,000 in a cash ISA only.
- Child trust funds (CTFs) – Now defunct tax-free savings account for kids born between 2002 and 2011.
- Collective funds – Stocks and shares funds administered by the parents but belonging to the child.
- Offshore funds – Income and gains held tax-free until sold and set against the child’s personal allowance.
- Life assurance investment bonds – Used to postpone potential tax liabilities until they’re cashed in.
- Personal pensions – Generous tax breaks make personal pensions an effective way to invest for children.
- Friendly society bonds – Tax-free savings schemes that can be designed to mature for a significant event.
When investing for your children over the longer term, you may want to use a trust. A bare trust, also known as a simple or absolute trust, gives the child absolute and immediate entitlement to the income and capital held in the trust when they reach the age of 18. Bare trusts are generally more tax-efficient but also quite inflexible. The other option is a discretionary trust, which allows trustees to decide how much income a beneficiary should receive and when. These are more flexible but involve additional tax costs.
Speak to an Acumen adviser today
This has been a whistle-stop tour of the options available to you. However, investing for children really does require some careful investment planning. The decisions you make now impact the future. Which is why we always recommend speaking to a fully qualified, independent financial adviser before making any decisions.
Our knowledgeable advisers here at Acumen will listen to your goals and aspirations and provide professional investment advice tailored to your needs. We are right up to speed with the latest investment products for children and can help you to secure the most tax-efficient investments for your children’s futures.