Most parents would like to be able to help their children fund a gap year, university fees and a deposit for houses, yet plucking several thousand pounds out of the air is not always possible. Advisers have an array of products specially created for children at their disposal, but mainstream alternatives can be just as useful.
The obvious first port of call when looking to build up a nest egg for youngsters is the Government sponsored Child Trust Fund (CTF) scheme. With the state contributing at least £250 for children born on or after September 1, 2002 to start the account and another contribution made when the child turns seven and parents and grandparents able to contribute up to £1,200 a year on top – all tax-free, it can be an appealing option. However, adviser opinion is mixed on just how useful CTFs are in saving for children,
James Davies, investment research manager at Chartwell Group says: “It’s difficult to knock something that is, in effect, free. However, I would question – from a pure investment point of view – the real value of CTFs.
“By the time inflation has taken its toll, it’s certainly not worth investing in the cash products and the choice and range for the stock market or investment-linked ones are so narrow,” he says.
Juliet Schooling, head of research at Chelsea Financial Services is more encouraging. She says the Children’s Mutual CTF offering stands up in terms of investment-linked offerings. “With a CTF you don’t get capital gains tax (CGT) or income tax payable on it and it’s also considered outside an estate for inheritance tax planning (IHT),” Schooling says. “It can be moved into an Isa when the child turns 18.”
Jason Hollands, director and head of group communications at F&C Investments believes non-stakeholder investment CTFs offer up the best opportunities in this arena. “We think that’s where you’ll make the best long term returns. Not only because there is more choice, more variety in markets, fund managers and the products on offer, but also in the case of the investment trust based plans, when it comes to charges it’s actually cheaper than the stakeholder options,” he says.
While a useful building block, the restrictions on the amounts that can be contributed to CTF accounts can be limiting for high net worth clients. The fact that the child automatically has access to the account from age 18 can also be a dissuading factor.
Other simple planning options include National Savings & Investments Children’s Bonus Bonds, in which parents can invest up to £3,000 per issue for five years tax-free. There are also a variety of friendly society savings plans and parents may look to make use of their own Isa allowances to invest for children. As Hollands warns, investment through a parent’s Isa allowance does ultimately rely on the parent passing that money on, as the child has no legal right to it.
Meanwhile, many advisers say it is important to look beyond children specific investment products when investing for children.
Davies believes the best way of saving for children is by making one-off or regular investments into a unit trust, or other open ended investment and designating it to the child with their initials. However, a more comprehensive way to allocate an investment to a minor is through a bare trust, making the child the legal owner, within the auspices of the trust, he says.
“On that basis any unit trust can be wrapped into one of these trust arrangements – certainly most of them can. So then it’s the same sort of investment approach that you would have for anyone with an 18-year, or a long term time horizon,” he says.
Davies recommends a good cautious managed or balanced managed fund is a good option when investing for children, and Hollands offers similar sentiments. “There is nothing to stop you from buying a favoured unit trust or investment trust or share and having the share registered in your name, but signifying that the account is designated for the benefit of the minor, or getting your solicitor to provide the necessary bare trust wording for you,” he says.
Hollands also suggests that tracker funds can be a sensible approach for those parents not wanting to be actively involved in the investment. “If you really do want to just file and forget it for 18 years, then some sort of passive investment might not be such a bad option,” he says.
Bob Perkins, technical manager at Origen says making use of trusts offers parents much more control over their investment, enabling them to determine when the child benefits from the cash.
While bare trusts and designated accounts are the most commonly used methods, he says discretionary trusts also offer control and a great deal of flexibility, while interest in possession trusts can be useful too.
Perkins adds that there can be some confusion around designation, because with some collective investments, investors can designate an account name, which leaves the account in the parent’s ownership but earmarks it for the child. This is different to having a designated holding – which is when the child is incorporated into the ownership of the investment – offering all the benefits of a bare trust.
Jason Witcombe, director of Evolve Financial Planning believes parents should do what is best for their finances first if they want to ultimately benefit their children. This could even mean paying down their mortgage in preference to investing specifically for a child.
He suggests taking a similar approach to saving for school fees and says even drawing down on an offset mortgage can be a good option.
“The method I would use is to not bother going for a sort of financial product that is marketed as a school fees savings plan,” he says. “It comes down to investing in your own name in whatever seems the most sensible way – but not needing any fancy products to help you pay the school fees,” he says.
Zero dividend preference shares are often promoted as a useful way of investing for school fees, but some advisers suggest these can be a hard sell to consumers, despite their merits.
For those ultra high net worth clients keen to create family dynasties, Lawrence Graham LLP (LG) looks beyond simple trust planning to more elaborate solutions.
Nick Rucker, private capital and investment funds partner at LG says these more complex planning options are aimed at individuals with a level of wealth that requires more than just simple asset protection or succession planning. However, this planning is bespoke and has considerable up- front cost and therefore remains the domain of the ultra-wealthy.
“You’re looking way beyond three generations and effectively trying to shore up assets like family companies, which can be very badly affected by family fallouts. It’s really about how families, working within parameters that they have set themselves, can protect and manage the family wealth and reputation rather than who gets what”, Rucker says.
LG achieves this through methods such as the use of private trust companies which act as the trustee of one or more family trusts. It then implements the more flexible Cayman STAR trusts or Bermuda purpose trusts on top, which own the shares in the private trust company.
But for the majority of clients, it seems investment decisions for their children largely hinge around whether it is control over the funds or tax-effectiveness that is of primary concern.
Investing for children
• The parent retains ownership of the money, but it is ‘designated’ for the child
• The parent is liable for any income or capital gains tax liability accrued
• The money forms part of the parent’s estate for inheritance tax purposes
• The parent decides when the child benefits from the money
• The money becomes the property of the child, but held by the parent
• It is the child who is liable to any income or capital gains tax liabilities accrued and can therefore make use of their own tax allowances
• The money is not part of the parent’s estate for inheritance tax purposes
• The child can access the money at 18 years old
CHILDREN – What’s best for the parents?
For Premier Wealth Management managing director Adrian Shandley, the most important thing to establish first up with high net worth clients looking to invest for their offspring, is Shandley: Tax or control? Which is the driver?which is more important to them – tax-efficient investment, or retaining control of their “little darling’s” nest egg.
“You’ve always got to sit a client down and say what’s more important to you – the tax side, because you’re a higher rate tax payer or you’ve got an inheritance tax liability – or the control,” he says.
For those parents for whom keeping the investment out of the IHT net is the most important factor Shandley recommends the Invesco Perpetual Children’s unit trust for those looking to invest smaller sums.
“I like the Invesco Perpetual Children’s unit trust, not because it’s a fantastic performer – it isn’t – but you can put modest sums in it and it’s structured as a children’s investment so it’s not wildly risky.”
Beyond that, Shandley abandons products specifically targeted at children, preferring to construct portfolios himself. For young children he believes emerging markets can form a useful part of a portfolio, while for children in their teens he looks to balanced managed high income funds, favouring offerings from Neptune and Artemis.
“But if they’re younger kids I would really push the boat out on a longer term emerging market type investment,” he says.
Shandley also describes saving for school fees as prohibitive. “I think that for the people who need to save the money to fund private education, the contributions that you have to make are very high. While for the people who can afford to make the contributions – they don’t generally need to save for it anyway.”
Juliet Schooling: “A CTF can be moved into an Isa when a child turns 18”