For this week’s blog, I thought I would cover a topic which I am increasingly asked about – the best way to save money for children or grandchildren. We all know that future generations of our families are likely to face financial hardship – steep tuition fees for education and the struggle to purchase that first home. The government have recently introduced the new ‘Junior ISA’ plan and this forms the basis of what I want to write about.
What would you have done if, on your 18th birthday, you had been handed a cheque for £100,000? Or, if you have children of that age, what do you think they would do with it? We probably would all like to think – or hope – that they would be sensible with it, but just how sensible are the majority of 18 year olds? Think of the temptation!
You may think that this does not apply to you, as you do not plan to make such substantial savings, but it only takes 5% per annum interest on the maximum subscription into a Junior ISA of £3,600 each year to generate a sum of just over £100,000 at age 18. Research shows that the average amount people are planning to save into Junior ISAs is £93 per month which would amount to £34,000 at age 18 (again, assuming a 5% per annum growth rate).
So, let’s look at Junior ISAs themselves. They are basically a tax free savings account for children, which anyone can pay into on behalf of the child, making them popular with grandparents and other relatives. The money cannot be withdrawn until the child reaches the age of 18 which does make them somewhat inflexible, although some people may see this as a bonus. The child will take control over the account at age 16 but cannot withdraw funds until age 18. Upon their 18th birthday, they can withdraw all of the funds or can roll them over into a normal adult Investment ISA. The real benefit to these plans will be that they will be free from Capital Gains Tax, which can make a big difference over a longer period of time.
As I see it, there are two dangerous issues with the Junior ISA – one being the child taking control over it at age 16, when potentially they could decide to have a gamble and invest it all in the Russian stockmarket for example, and secondly, that the parent has no control over what they do with the money past the age of 18, when they could decide to blow it all on whatever they like.
If this is a concern, there are other options available, for example setting up a discretionary trust, which although not as tax efficient, gives control to the person setting it up for as long as they wish. Basically, they have ‘discretion’ over when the funds are advanced to the child, at whatever age they feel appropriate. So you may decide to only advance funds for things which you deem sensible, for example a house purchase or the cost of higher education.
Of course, there are many options and which one is suitable for you entirely depends on your circumstances and objectives. Hopefully, I have outlined some of the reasons why taking professional financial advice is essential, without it there could be a lot of teenagers driving round in Ferraris in 18 year’s time!