Saving for Children and Grandchildren – The Importance and Challenges

Our Head of Technical Services, Brian Radbone, explores the options available to you.

It’s always been important to people to provide for the future of their children and grandchildren. Economic changes in recent years have meant career paths and the certainty of regular income are less definite for the younger generation than previously, while the level of property prices have seen an increased need for help as young people seek to get on the property ladder.

Traditional savings options such as National Savings, child bank accounts, designated unit trust plans held under a bare trust and life assurance policies for children still offer tax advantaged options, however the charges and rates for some of these can outweigh such advantages. In more recent times we have seen the introduction of more cost-effective saving options, namely Child Trust Funds and junior ISAs (JISAs), while for younger adults, the introduction of the Lifetime ISA (LISA) has provided an attractive option for first time home buyers, with the government giving up to a £1,000 bonus on annual subscriptions made.

With the exception of the LISA, where you have to be at least 18 to open one, the other options are set up such that they are the beneficial property of the child, who will take control from 18. For many this will not be an issue, but the amounts that can be accrued over time can be considerable (currently £9,000 per year can be subscribed to a JISA with no limit to the amount that can be held in a bare trust) and there is no ability to control this when the sums accrued are available to the child. Of course, from a tax perspective they are efficient options – JISAs are tax-free, while the child’s income and CGT allowances can be used for the bare trust investments (unless the parents have gifted the funds and the income exceeds £100). Also the gifts (to the extent they are not covered by the annual gifting allowance or the gifts out of normal expenditure exemption) will be out of the donor’s estate after seven years.

If control is key, then the donor can notionally set aside the amounts to gift when they are happy to, but that means the funds remain in the donor’s estate until the gift is actually made – at which point the seven-year period commences. Meanwhile the donor remains liable for any income tax and CGT that may arise prior to making the gift. Alternatively, sums can be gifted into a discretionary trust so that the donor can advise the trustees (of which they are likely to be one) as to how and when the funds are to be distributed to the intended beneficiaries. These trusts will have to be registered with tax returns submitted by the trustees if there is any income or capital gains (although the donor will be liable for any gains arising on an investment bond while they are still alive). Inheritance tax may also be payable if all gifts of this type made by the donor over seven years exceed the nil rate band (currently £325,000) as well as on each ten-year anniversary, and when capital is distributed from the trust.

In addition to the above options, it is also possible to set up pensions for minors for gross contributions of up to £3,600 per annum. The main difference here of course is that the funds cannot be accessed until the minimum pension age, which is to increase to age 57 from April 2028 and could increase again beyond that. Although, in a world where there will be no DB schemes and low annual allowances, the overall advantages of junior pension tax relief are better than JISAs and support pension saving for the next generation.

A platform such as Transact provides an excellent solution for managing all these varied aspects of intergenerational planning – the various parties’ portfolios can be linked for charging purposes and use can be made of the wide range of ‘in house’ tax wrappers to give tax-efficient planning solutions, while the broad range of available assets that can be purchased and held enables a high degree of investment strategy planning.

In view of the increasing importance of planning for children, we have now removed the £20 quarterly wrapper charge from pensions for minors (in linked family groups) until age 18, thus reducing the impact of the charges applied to relatively low level of contributions and removing a barrier for many who are seeking to have all their family members’ investments held in one place.