The Junior ISA scheme was launched at the start of November 2011 and has since become a popular way to save for a child’s future. For those who haven’t yet investigated the option it is worth reminding oneself what exactly an ISA is and in particular, the definition of a Stocks and Shares ISA (SSISA). This article focuses on SSISAs but to give a full overview on the product we will also need to look at the full gamut of ISA options and the context in which the product fits into the financial spectrum.
An ISA is a financial product in which people can save and invest money with the benefit of certain tax breaks. They were launched at the start of the 1999/2000 tax year with the aim of providing the wider public with a more accessible tax beneficial savings solution than the existing Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs).
The main attractions of ISAs are that they carry tax exemptions on the income generated by the products whilst still allowing savers to instantly access their funds. They also allow savers to invest in stocks and shares as well as just storing their funds a cash. There are however restrictions which apply in that there is a limit (or rather limits - see below) to the amount of money that savers can put in each tax year.
There are currently two types of ISA available to the UK saver: the Cash ISA (CISA) and Stocks ad Shares ISA (SSISA). As the names suggest the CISA is primarily designed to hold cash whilst the SSISA is primarily designed as a vehicle for investing savings in stocks and shares.
Stocks and Shares ISAs are available to over 18s (Cash ISAs are open to over 16s) and can hold a range of investments including, amongst others, cash (as long as it is deemed to be awaiting investment), collective investments (Units Trusts, OEICs and Investment Trusts. Subject to certain criteria), company shares (listed on recognised stock exchanges and debt securities (corporate bonds, government bonds. Subject the term having at least 5 years to run). All of the non-cash investments must also be deemed to have the potential to lose 5% of their value to be permitted. Any that are not, may in theory be held in a CISA but it is rare to find a provider that offers the service.
A contribution to an ISA is termed a subscription and all ISA subscriptions must be made in cash. The limit that savers can subscribe to ISAs in total for the current tax year is £10,200. All of this allowance can be paid into a Stocks and Shares ISA or up to half, £5,100, can be paid into a Cash ISA with the remainder of the unused £10,200 allowance going into a SSISA. These limits are set to rise in line with inflation each tax year (with increments rounded to the nearest £120), with the figures for 2011/12 being £10,680 (SSISA/Total) and £5,340 (CISA).
Subscriptions cannot be spread between multiple ISAs of the same kind in the same tax year, although subscriptions can be made to both a Cash ISA and Stocks and Shares ISA concurrently. There is also no limit on the number of ISAs that an investor may hold from previous tax years.
Funds can be transferred between ISAs although there are restrictions to ensure savers can’t oversubscribe. The transfers must occur directly between ISA providers; if the money is withdrawn by the saver with the intention of placing it back in another ISA it effectively becomes a subscription and therefore affects their allowance for that tax year.
If a saver is transferring monies that are current year subscriptions from one Cash ISA to another CISA they must transfer the entire sum of current year subscriptions to ensure that they have not subscribed to two separate CISAs in the same tax year. However, a saver can transfer only part of their current subscriptions from a CISA to a Stocks and Shares SISA as the allowances of the two products can be adjusted accordingly (the transfer would then count against the SSISA allowance not the CISA).
Neither the Stocks and Shares ISA or the Cash ISA are subject ot Capital Gains Tax (CGT) although that does also mean that any losses made on the SSISA cannot be used to offset gains elsewhere and reduce an individual’s CGT obligation. Both ISAs are exempt from tax on dividends,the SSISA is exempt from tax on interest on bonds whilst the CISA is also exempt from tax on interest from cash.
Stocks and Shares ISAs are still subject to other charges though such as Initial Management Charges (IMCs), Annual Management Charges (AMCs) and transaction charges by the ISA provider or fund manager, however, these charges are often heavily discounted or removed for commercial reasons. Any charges on Cash ISAs will most likely be incorporated into the interest rate calculations.
Although ISAs were designed to supersede the existing PEPs and TESSAs when they were launched in 1999, both products were maintained alongside the new ISAs - that is they could still be held although no longer open to new subscriptions. TESSAs allowed savers to invest £9,000 across a 5 year term during which the saver could draw down the interest on the capital but not the capital itself, which could only be withdrawn when the account matured. For those maturing after the introduction of ISAs, the TESSA-Only ISA (TOISA) was created to allow the saver to reinvest the capital. The last TESSAs matured on 5 April 2004. However, at the start of the 2008/09 tax year the decisions was taken to re-classify the PEP and TOISA to fit into the ISA structure; PEPs became de jure SSISAs and TOISAs became CISAs.
The structure of the ISA was slightly different when it was launched as it is today in that there two main types available, the mini and the maxi ISAs. Mini ISAs were further categorised as Stock or Cash ISAs, although an individual could subscribe to one of each within a given year (even with different providers). The limits were set to £4,000 for the mini stock ISA and £3,000 for the mini cash ISA, with a total subscription limit therefore of £7,000. The alternative maxi ISAs combined the cash and stock elements into one product although the limit to cash subscriptions remained at £3,000 and the total allowance at £7,000; any of the £7,000 not invested in cash could be invested in stock. The switch the current structure of Cash ISAs and Stocks and Shares ISAs with no mini vs maxi distinction came at the start of the 2008/09 tax year.
Going forward the UK Government have announced that they are to launch a Junior ISA for the 2011/12 tax year which will replace the outgoing child trust fund. The Junior ISA will allow guardians to subscribe to an ISA on behalf of a minor who will then have access to the funds when they turn 18. In all other aspects the ISA will follow the conventional structure and rules.
With the clock counting down to the end of the tax year now might be the last chance to take advantage of this tax year’s ISA allowances or to do your research ready for the advent of the next set of allowances. Either way, it might be a good time to investigate opening a Stocks and Shares ISA or ISA investment Trust.
© Stuart Mitchell 2012
Showing posts with label savings. Show all posts
Showing posts with label savings. Show all posts
Wednesday, 19 December 2012
Monday, 20 August 2012
The Junior ISA at a Glance
The Junior ISA (JISA) has rarely been out of the news since its launch at the tail end of last Autumn, with many debating its merit as a vehicle for saving for our chidren’s futures and whether it adequately fills the gap left by the late Child Trust Fund. However, for any parent who’s considering opening one for their child it is worth getting to grips with the basic facts before weighing up their options and, to that end, the following provides an at-a-glance view of all the most pertinent information about JISAs.
Who is Eligible for a JISA?
Who Can Open a JISA?
What Accounts Can Be Opened?
How Much Can Be Put In?
What are the Investment Options?
The monies within a Junior ISA can be apportioned however you wish amongst these options but, as with an adult ISA, the cash elements must be held within a Cash ISA (unless the cash is awaiting investment within the Stocks & Shares ISA) and the other investments, including Shares and Collectives, must be held within a Stocks and Shares ISA. For a full breakdown of all the investment options you should refer to a financial adviser and/or check the various providers on the market, however the investment opportunities will vary from one provider to another.
What Tax Breaks are Available?
When Can the Monies be Accessed?
Although the child can take over control of the Junior ISA as the registered contact when they turn 16, they will still not be able to withdraw the money until their 18th birthday. If the child is terminally ill the registered contact may apply to the HMRC to withdraw the monies and if the child has died the monies will pass within their estate to the relevant beneficiaries.
© Stuart Mitchell 2012
Who is Eligible for a JISA?
- UK resident children (i.e., younger than 18) born...
- since 1 January 2011
- before 1 September 2002
Who Can Open a JISA?
- Parent/Guardian
- in the name of their child
What Accounts Can Be Opened?
- One Cash ISA
- One Stocks & Shares ISA
How Much Can Be Put In?
- £3,600 per tax year
What are the Investment Options?
- Cash
- Shares
- Collective Investments (Investment Trust, Unit Trusts, OIECs etc)
- Debt Securities (Bonds etc)
The monies within a Junior ISA can be apportioned however you wish amongst these options but, as with an adult ISA, the cash elements must be held within a Cash ISA (unless the cash is awaiting investment within the Stocks & Shares ISA) and the other investments, including Shares and Collectives, must be held within a Stocks and Shares ISA. For a full breakdown of all the investment options you should refer to a financial adviser and/or check the various providers on the market, however the investment opportunities will vary from one provider to another.
What Tax Breaks are Available?
- Income Tax
- including Dividend Tax
- Capital Gains Tax (CGT)
When Can the Monies be Accessed?
- When the child turns 18
- If the child is terminally ill
- If the child has died
Although the child can take over control of the Junior ISA as the registered contact when they turn 16, they will still not be able to withdraw the money until their 18th birthday. If the child is terminally ill the registered contact may apply to the HMRC to withdraw the monies and if the child has died the monies will pass within their estate to the relevant beneficiaries.
© Stuart Mitchell 2012
Monday, 30 January 2012
The Value of Saving for Your Child’s Future in Hard Times?
There is a currently a wealth of information and research being released regarding the cost of living and in particular the cost of raising children. It is therefore an opportune time to look at what the latest pieces of research tell us not only about the costs of bringing up children but the value in investing in their future. Almost everybody is feeling the pinch but is it too easy to forget about the longer term?
The latest edition of the Cost of a Child: From cradle to college 2012 report by Liverpool Victoria and the Centre for Economics and Business Research from January 2012 estimates that the average cost of raising a child has shot up once more (by 3.3%), now reaching £218,000 across the period until the child reaches 21. What’s more, with incomes stagnating or even dropping, the ability of parents to afford these rising costs is not keeping pace. Indeed the same research also indicates that 76% of parents are being forced to make cuts in their spending and perhaps more worryingly, 43% of parents are actually reducing the amount they put into savings accounts.
This may not be new news to most parents but it does seem to be focusing their minds on the affordability of childcare in the here and now rather than necessarily thinking about the future.
However, the research also indicates that the steepest rise in the cost of bringing up a child is incurred when funding the child through higher education and that the rise isn’t so severe in the earlier years. It may hint at a suggestion that parents should try to put money to one side in these early stages to fund their child’s first adult years and there are further reasons why saving for this time is worthwhile.
Housing
House prices are currently stagnating, demonstrating that they are seemingly unlikely to fall drastically even when times are tough. It would appear that there is some positive news in the market for first time buyers (FTBs) in that there are now more houses available which theoretically fit into the affordable bracket (less than 4x the average income of the area) than at any time in the last eight years. Although, more worryingly for the future that doesn’t translate into buyers being able to afford these in practice as mortgage lenders are requiring higher deposits and so buyers are prevented from moving into the market as easily as they once did.
In fact the picture for first time and non-first time buyers reflects this. Depending on the research, the average age at which FTBs enter the market now is somewhere between 30 and 38 whilst being predicted by some to reach 40 before the decade is out. Research from Halifax puts the number of FTBs in the market at a record low and Scotland for example, according to the BoS has the lowest number of FTBs in the market since 1976; despite the paradoxical finding that the average price in 77% of local authorities is now classed as affordable in comparison with the average wage.
Education
Research just out from the Association of Graduate Recruiters shows that graduate salaries are on the rise despite the difficulties seen by the job market. The average wage for a graduate is anticipated to rise to £26k, a 4% rise on the previous year whilst the number of opportunities available to graduates is actually dropping. The evidence therefore seems to point towards a more competitive graduate job market where jobs may be harder to come by but one in which the salaries will be more rewarding for those who are successful. The trend may be indicative of a flight to quality in a period where employers are ensuring that they get the best returns on their personnel investments and does suggest that even, or perhaps more so, in a struggling economy, having an academic background may give your child a head start. Saving for your child during their upbringing can ensure that they are better placed to support themselves throughout their higher education and get the qualifications they need (even putting to one side the issue of tuition fees which may be best repaid later on in life).
The latest edition of the Cost of a Child: From cradle to college 2012 report by Liverpool Victoria and the Centre for Economics and Business Research from January 2012 estimates that the average cost of raising a child has shot up once more (by 3.3%), now reaching £218,000 across the period until the child reaches 21. What’s more, with incomes stagnating or even dropping, the ability of parents to afford these rising costs is not keeping pace. Indeed the same research also indicates that 76% of parents are being forced to make cuts in their spending and perhaps more worryingly, 43% of parents are actually reducing the amount they put into savings accounts.
This may not be new news to most parents but it does seem to be focusing their minds on the affordability of childcare in the here and now rather than necessarily thinking about the future.
However, the research also indicates that the steepest rise in the cost of bringing up a child is incurred when funding the child through higher education and that the rise isn’t so severe in the earlier years. It may hint at a suggestion that parents should try to put money to one side in these early stages to fund their child’s first adult years and there are further reasons why saving for this time is worthwhile.
Housing
House prices are currently stagnating, demonstrating that they are seemingly unlikely to fall drastically even when times are tough. It would appear that there is some positive news in the market for first time buyers (FTBs) in that there are now more houses available which theoretically fit into the affordable bracket (less than 4x the average income of the area) than at any time in the last eight years. Although, more worryingly for the future that doesn’t translate into buyers being able to afford these in practice as mortgage lenders are requiring higher deposits and so buyers are prevented from moving into the market as easily as they once did.
In fact the picture for first time and non-first time buyers reflects this. Depending on the research, the average age at which FTBs enter the market now is somewhere between 30 and 38 whilst being predicted by some to reach 40 before the decade is out. Research from Halifax puts the number of FTBs in the market at a record low and Scotland for example, according to the BoS has the lowest number of FTBs in the market since 1976; despite the paradoxical finding that the average price in 77% of local authorities is now classed as affordable in comparison with the average wage.
Education
Research just out from the Association of Graduate Recruiters shows that graduate salaries are on the rise despite the difficulties seen by the job market. The average wage for a graduate is anticipated to rise to £26k, a 4% rise on the previous year whilst the number of opportunities available to graduates is actually dropping. The evidence therefore seems to point towards a more competitive graduate job market where jobs may be harder to come by but one in which the salaries will be more rewarding for those who are successful. The trend may be indicative of a flight to quality in a period where employers are ensuring that they get the best returns on their personnel investments and does suggest that even, or perhaps more so, in a struggling economy, having an academic background may give your child a head start. Saving for your child during their upbringing can ensure that they are better placed to support themselves throughout their higher education and get the qualifications they need (even putting to one side the issue of tuition fees which may be best repaid later on in life).
In conclusion, the latest research when taken in unison paints a picture in which families are unfortunately being squeezed from all sides; being forced to cut back on outgoings in the present but requiring the investment in their child’s future more and more. This will lead to many families needing to make some very difficult decisions but it is crucial that as much as is possible, they keep the long term in their thoughts and don’t simply focus on the present.
Monday, 9 January 2012
Why Save for Your Child’s Future?
The demise of the child trust fund set up by Labour in 2005 and the prospect of the Conservative-Liberal Democrat coalition’s new Junior ISA in the autumn of 2011 means that for many they will be re-assessing whether and how they will be saving for their child's future. As the cost of living seems set to continue its upward path, it is therefore worth taking a look at the benefits that still exist for putting money aside for children.
There are significant tax breaks to be gained when saving on behalf of your children, although as with all such schemes there are some limits and restrictions to be aware of.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for child savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start saving for children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
There are significant tax breaks to be gained when saving on behalf of your children, although as with all such schemes there are some limits and restrictions to be aware of.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for child savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start saving for children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
Encouraging Your Children To Save
Parents receive plenty of advice recommending that they consider saving money on behalf of their children, with successive governments also offering incentives in the form of the old tax efficient Child Trust Funds (CTFs) and the new Junior ISAs. The launch of the latter at the start of November has brought the subject back to forefront of many parents’ minds and it is therefore an opportune time to look at the reasons why it is not only a good idea to save on behalf of your children but to get them involved in the process as well.
Creating a Nest Egg
The primary reason for opening a savings vehicle for your child is usually to create a nest egg for their future; to put money aside which will help them on their way as they embark on adult life. The general economic troubles of the last few years together with the more acute issues, such as the raising of the tuition fee limit and the recent publication of youth unemployment figures topping 1 million, serve as timely reminders that you never quite know what the future may hold for you children when they reach adulthood. Therefore, any nest egg a child can access when they turn 18 may prove invaluable whether it helps cover their cost of living at university, their self sufficiency when employment is hard to come by or even if it helps them to get onto the property ladder.
To that end, savings vehicles such as the CTF or the Junior ISA are designed so that any money put into them will be protected until the child turns 18 in order for the funds to be available when they are most needed.
Educational Benefits
Beyond the more obvious financial benefits of opening a savings vehicles for you child it can also provide an excellent opportunity to introduce your offspring to the world of money so that they can be well prepared when the day comes for them to first take control of their own finances.
By getting children involved in the management and monitoring of their own savings you can increase their familiarity with concepts such as banks and interest and introduce them to the ideas that money you/we put into banks will grow and is (for the most part) secure. You can encourage them to understand that, for savings at least, the mechanics can boil down to the idea that we lend our money to the banks who will then pay us in return and that the amount they pay us is described in the interest rate. Once they are familiar with the more basic concepts they can be encouraged to take part in choosing their own accounts based upon criteria such as interest rates, and then monitoring their progress as they go.
Tax Benefits
Savings accounts for children are often referred to as being tax free which creates the false impression that children do not need to pay any tax at all on their money. In truth there are no differences between the tax children should pay on any money they put aside in savings accounts in comparison to their adult counterparts. In terms of interest, they are subject to the same income tax bands as adults, under which they are not required to pay tax on any income up to £7,475. For most (unemployed!) children this threshold is not likely to come into play but for children who may have extra earnings, parents should be aware.
There are further tax breaks though when adults wish to donate to a child’s savings plan. For any sum put aside by a parent or step parent the interest accrued will be tax free up to the limit of £100 per year, so where a child may have two parents and two step parents for example, this limit could even reach £400. What’s more, the limits do not apply to grandparents or any other generous adults so they can donate any amount of money to your child which would then benefit form tax free interest.
Through vehicles such as the Junior ISA (for children born after 3 January 2011 or before 1 September 2002) and the CTF (for children born between those dates) there are additional tax breaks on offer which mirror those of adult ISAs, such as an exemption from income, dividend and capital gains tax, but in turn the funds are locked up until the child reaches 18 as mentioned above.
Savings for Parents
It may seem slightly cheeky but, within limits child savings can be used as a means of saving a little bit more for the parents whilst taking advantage of the tax breaks. Obviously the above restrictions are designed to partly negate this and stop parents abusing their child’s savings options to circumnavigate tax but there is scope for benefiting up to the aforementioned £100 interest limits per parent. It is always worth remembering though that the money you put into a child savings vehicle does legally belong to the child not the parent (even though the child may not be able to do anything with it without your parental authority).
There are plenty of reasons why saving for children is a beneficial exercise and maybe the hardest decision you’ll have is working out which child savings vehicle is most appropriate for you situation, so it is always a good idea to seek out independent financial advice before committing to anything.
Creating a Nest Egg
The primary reason for opening a savings vehicle for your child is usually to create a nest egg for their future; to put money aside which will help them on their way as they embark on adult life. The general economic troubles of the last few years together with the more acute issues, such as the raising of the tuition fee limit and the recent publication of youth unemployment figures topping 1 million, serve as timely reminders that you never quite know what the future may hold for you children when they reach adulthood. Therefore, any nest egg a child can access when they turn 18 may prove invaluable whether it helps cover their cost of living at university, their self sufficiency when employment is hard to come by or even if it helps them to get onto the property ladder.
To that end, savings vehicles such as the CTF or the Junior ISA are designed so that any money put into them will be protected until the child turns 18 in order for the funds to be available when they are most needed.
Educational Benefits
Beyond the more obvious financial benefits of opening a savings vehicles for you child it can also provide an excellent opportunity to introduce your offspring to the world of money so that they can be well prepared when the day comes for them to first take control of their own finances.
By getting children involved in the management and monitoring of their own savings you can increase their familiarity with concepts such as banks and interest and introduce them to the ideas that money you/we put into banks will grow and is (for the most part) secure. You can encourage them to understand that, for savings at least, the mechanics can boil down to the idea that we lend our money to the banks who will then pay us in return and that the amount they pay us is described in the interest rate. Once they are familiar with the more basic concepts they can be encouraged to take part in choosing their own accounts based upon criteria such as interest rates, and then monitoring their progress as they go.
Tax Benefits
Savings accounts for children are often referred to as being tax free which creates the false impression that children do not need to pay any tax at all on their money. In truth there are no differences between the tax children should pay on any money they put aside in savings accounts in comparison to their adult counterparts. In terms of interest, they are subject to the same income tax bands as adults, under which they are not required to pay tax on any income up to £7,475. For most (unemployed!) children this threshold is not likely to come into play but for children who may have extra earnings, parents should be aware.
There are further tax breaks though when adults wish to donate to a child’s savings plan. For any sum put aside by a parent or step parent the interest accrued will be tax free up to the limit of £100 per year, so where a child may have two parents and two step parents for example, this limit could even reach £400. What’s more, the limits do not apply to grandparents or any other generous adults so they can donate any amount of money to your child which would then benefit form tax free interest.
Through vehicles such as the Junior ISA (for children born after 3 January 2011 or before 1 September 2002) and the CTF (for children born between those dates) there are additional tax breaks on offer which mirror those of adult ISAs, such as an exemption from income, dividend and capital gains tax, but in turn the funds are locked up until the child reaches 18 as mentioned above.
Savings for Parents
It may seem slightly cheeky but, within limits child savings can be used as a means of saving a little bit more for the parents whilst taking advantage of the tax breaks. Obviously the above restrictions are designed to partly negate this and stop parents abusing their child’s savings options to circumnavigate tax but there is scope for benefiting up to the aforementioned £100 interest limits per parent. It is always worth remembering though that the money you put into a child savings vehicle does legally belong to the child not the parent (even though the child may not be able to do anything with it without your parental authority).
There are plenty of reasons why saving for children is a beneficial exercise and maybe the hardest decision you’ll have is working out which child savings vehicle is most appropriate for you situation, so it is always a good idea to seek out independent financial advice before committing to anything.
Wednesday, 6 April 2011
Why Save for Your Child’s Future?
The demise of the child trust fund set up by Labour in 2005 and the prospect of the Conservative-Liberal Democrat coalition’s new Junior ISA in the autumn of 2011 means that for many they will be re-assessing whether and how they will be saving for their child's future. As the cost of living seems set to continue its upward path, it is therefore worth taking a look at the benefits that still exist for putting money aside for children.
There are significant tax breaks to be gained when saving on behalf of your children, although as with all such schemes there are some limits and restrictions to be aware of.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for Child Savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start Saving for Children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
Savings accounts for children are exempt from any tax on the interest that accumulates on deposits as long as the child in question does not have a total income exceeding £6,475 for the current tax year (as with adults). However, if the money which is donated by an individual parent or step parent earns more than £100 interest in a tax year then the interest will be taxed as normal. This limit applies per parent though, so in a family with both parents present, the combined possible limit is £200 and there is even the potential for the limit to be as high as £400 if two step parents are involved. What’s more, the limit does not apply to grandparents and other adults that wish to contribute to a child’s savings plan. Therefore, these restrictions should not prevent parents and guardians from accumulating a healthy nest egg for their children which also benefits from the tax exemptions.
In addition, it is worth bearing in mind that any money placed into a child’s savings account will avoid being taxed inheritance tax providing the donor does not die within seven years of making the donation.
Whilst the Child Trust Fund (CTF) is being phased out by the coalition government, it is still a valid savings solution for many parents and their children. All children born between September 1st 2002 and January 2nd 2011 were eligible to start a child trust fund if they were paid any child benefit before January 3rd 2011. For those who have already opened an account, payments can still be made into it until the child turns 18. The trust benefits from a starting contribution from the government of at least £250 (except children who first received child benefits after August 2nd 2010 who will receive £50 only) with the possibility of further contributions for children in low income families. All income and gains from the CTF will be tax free although the contributions made by parents (or any other donors) must not exceed £1,200 in the tax year. The funds are held in trust for the child and although they can take over the management of the fund when they turn 16, they cannot withdraw funds until they turn 18 years of age. At which point they will also be able to transfer the funds to an ISA to protect the tax exempt status.
The coalitions government’s replacement to the CTF is the Junior ISA which is due to launch in the Autumn. The Junior ISA will not receive the government contributions that the CTFs benefited from however it will allow parents to save on behalf of their children and take advantage of the tax exemptions and investment choices that adults can currently benefit from with conventional Cash ISAs and Stocks and Shares ISAs.
There are a few other savings solutions for children which should be mentioned including the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates. These plans also benefit from tax exemptions but differ in the terms for which they run and how the income is generated.
Having outlined the available options for Child Savings and their advantages, time should also be spent considering why it is beneficial to save for your child’s future.
The recent fracas that has surrounded the coalition government's revamp of the tuition fee structure has brought the issue sharply into focus for many parents who must now be wondering how they will give their children the best possible foundation to make the most out of their higher education and deal with the financial consequences when they come out of the other side. One thing that seems certain is that tuition fees are here to stay in some shape or form as all three major political parties in England at least have backed a incarnation of the fees.
For many of course, University may not be may not be the primary consideration. It could also be argued that, even if it is, should the policies surrounding tuition fees remain as they are today, the nest egg you save for your child would in fact be best used to lay the foundation for their post university lives. Therefore attention turns to equipping your children for their professional adult lives.
The current climate means that it is harder than ever for first time buyers to get onto the property market. The days of easily obtained 100% mortgages have gone and financial institutions (and the public) may be wary of them being re-introduced due to the troubles of the credit crunch and subsequent recession. The focus has really come back onto having a substantial deposit. Whilst prices have come back down to some extent they have not fallen drastically and will no doubt creep back up the stronger the economy gets. Arguably the difficulty for first time buyers to get onto the market only seems likely to increase. Meanwhile, with oil prices rising, and consequently the cost travel, food etc, there are plenty of reasons to give your children the best head start possible whn the time comes.
Having painted a slightly gloomy picture of the prospects for our future generations you may wonder whether you can accumulate an amount which will really make a difference, especially at a time when budgets are already being squeezed by the cost of living. It is worth emphasising therefore that a little amount can go a long way. The earlier you start Saving for Children the greater the potential for growth that those savings have. What’s more, any amount will start your child’s adult life on a positive footing rather than encouraging them to begin in debt.
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