We all want to give our family a financial head-start in life, but it is vital that parents and grandparents make savvy choices to supercharge their saving and investment efforts. Here, Lee Goggin, Co-Founder of findaWEALTHMANAGER.com, highlights six key steps.
The older generations invariably want to help the younger ones financially and we consistently hear from parents and grandparents who want to know how they can give money intelligently. The good news is that by choosing the right strategies, tax-wrappers and tools, you can maximise your whole family’s wealth.
You may be diligently saving for your children or grandchildren, but consider whether you are making the very mostof that money. Use this five-point checklist to see if you can supercharge your strategy.
1. Shop around when saving; start investing
Children’s savings accounts are generally paying pretty poor interest rates, so always shop around. You can get very much more attractive rates if you can commit to leave money in place for a longer period of time, for instance.
If you are saving on a long-term horizon, always bear in mind that investing will generally far outstrip any interest payments you could earn. It is possible to invest in a modest way each month (in fact this is the wisest way to invest as you smooth out the ups and downs of the market).
If you are saving on a long-term horizon, always bear in mind that investing will generally far outstrip any interest payments you could earn
You can hold investments in an account designated for your child, but it will still be in your name and treated as your investment so beware implications for your own tax position and take advice where necessary. Any income over £1,000 will be taxed at your rate.
2. Shelter gains through a JISA
As unbeatable tax “wrappers”, Individual Savings Accounts are vital wealth management tools for the whole family – children included – so make sure everyone is using all of their allowances every single year.
Allowances can be put into cash or stocks and shares, with all gains sheltered from tax. Adults can save £20,000 a year in an ISA (as of 2019/20) and children can have £4,368 saved on their behalf. Be aware, however, that any JISA funds legally pass to the child’s control once they turn 18.
By reinvesting gains and letting the magic of compounding work it’s magic over time, a JISA can become a very substantial pot through quite modest contributions
You can find attractive cash JISA rates if you are prepared to shop around, but given the power of an investment portfolio to power up returns it would be a shame to limit your strategy to cash. By reinvesting gains and letting the magic of compounding work it’s magic over time, a JISA can become a very substantial pot through quite modest contributions. As the pot grows, always consider the improved returns and tighter risk management that come through using a professional money manager.
3. Pensions for children
For those with an extra-long time horizon, setting up a pension for children is a very tax-efficient way to save for them as they get an extra 20% tax relief on contributions: if you pay in the maximum £2,880 each year, £720 in tax relief will make a grand total of £3,600; they will also get a 25% tax-free lump sum when they withdraw funds.
Typically, the pension is paid into regularly and this drip feeding of money into the markets and compounding over time can allow for significant amounts to build up before the beneficiary turns 18 and takes over the pension.
For those with an extra-long time horizon, setting up a pension for children is a very tax-efficient way to save for them
However, the funds will be inaccessible until the now-child is at least 55 (pension thresholds continue to rise over time). Early pension starters are also more likely breach their lifetime allowance (this has been progressively lowered to stand at £1,055,000 for the 2019/20 tax year). There are several other ways to save intelligently for retirement once the contribution limit has been reached, however, such as ISAs.
It can often be very helpful – and tax-efficient – to think of family wealth along intergenerational lines. There may be some very effective measures that can be taken to protect wealth across the generations, save tax and maximise gains. A conversation with a professional will cost nothing but could help optimise your financial affairs in a number of ways.
4. Family Investment Company
More and more of findaWEALTHMANAGER.com’s users are considering establishing a Family Investment Company (FIC). This is where family members hold shares in a private investment company which in turn holds assets of all kinds. You may choose to have investment portfolios for a number of purposes, including for private schooling or university fees, and build in any number of succession planning mechanisms to keep money in the family and away from the taxman’s net.
FICs can be precisely structured to suit the needs of each member and give the older generations a very great deal of control over how wealth is deployed while control is transitioned gradually over time.
As well as offering significant tax benefits, FICs can also help protect family assets against divorce.
FICs can be precisely structured to suit the needs of each member and give the older generations a very great deal of control over how wealth is deployed while control is transitioned gradually over time
5. Bare trusts
Bare trusts are a useful way to hold investments for a child. Any assets held within them are treated as the child’s for tax purposes, so their personal allowances and exemptions come into play.
We often encounter grandparents who wish to gift significant amounts to their grandchildren, but who fear that the money might be mismanaged or counted as marital assets in the case of divorce. Settling money into a bare trust is often an intelligent solution to allay these concerns and is a method very often used to help fund private school fees.
6. Have a flutter!
Premium Bonds from National Savings & Investments (NS&I) can be an accessible, fun way to put at least some money aside for the younger generation. Whereas only parents can make deposits into savings accounts, grandparents and others are free to buy Premium Bonds on a child’s behalf.
Available in amounts between £25 and £50,000, each £1 bond is entered into a monthly prize draw for prizes of up to £1m tax-free. Children will have great fun checking their numbers, no doubt.
Premium Bonds from National Savings & Investments (NS&I) can be an accessible, fun way to put at least some money aside for the younger generation
Be aware that Premium Bonds carry no real savings interest, bar what you may win over time. If you have maximised your child’s JISA allowance and are seeking low-risk ways to save and invest further, you should have a conversation with a professional to explore your options.
Make family wealth work harder
These are just a few of the ways in which parents and grandparents can supercharge their strategies for saving and investing for the next generation. There are many more available to pursue, some more investment focused and some more oriented towards financial planning.
Mitigating Inheritance Tax (IHT) is also top of the agenda for our users, and there are multiple options that a professional will be able to discuss with you and the wider family should you wish. Why not arrange to meet your best-matched advisors through our 3-minute search and discover what an expert could do for your wealth?