At Parental Choice, we’re always looking for ways in which we can help our fellow parents sort out the things that matter most to them. With all the stories in the papers today about A-level results and the 1000s of students who are now going off to university, it dawned on me that those now happy students could unfortunately end up leaving university with over £53,000 of debt. Something we as parents never had to face back in the days of free tuition! My children haven’t even started school yet and I dread to think what financial challenges they or should I say we (!) will face when its their turn to go to university.
Many of you may have seen our expert’s page on our website which gives some helpful tips on saving for children but I thought it might be interesting to set them out here. You never know but it might help soften that financial bump you and your children might face when it’s their turn to go to university!
The first thing to do is to open a bank or building society account for your child. You can open it in your child’s name with you acting as trustee. When you open the account make sure you sign an R85 form ensuring the interest they receive does not have tax automatically deducted from it. If an account is opened by a third party, such as a grandparent, you, the parent, will need to sign this HMRC form. When the child is 16, providing they are not a tax payer, they will need to sign an R85 in their own name.
Be aware however that there could be tax consequences for you from your children’s savings. If the money you have given to them earns over £100 in interest you, the parent, are liable for tax on that interest. This only applies to interest earned on the savings; gifts made by grandparents, other relatives and friends are not subject to the same conditions. £100 in interest might seem like a lot when interest rates are so low, but over the next 18 years they will rise and if they reach the levels expected by most economists, a modest investment could quite easily earn that amount of interest.
Alternatives to a deposit account include the Junior ISA. Launched in 2011, these are only available to children who do not have a Child Trust Fund. Just like adult ISAs, all of the returns are free of income and capital gains tax. Both types of Junior ISAs are available with an annual limit initially set at £3000 but due to rise annually. Most Junior ISAs have fairly low minimum contributions and offer the flexibility of individual and regular deposits or a combination of both. Children can only have 1 cash and 1 stocks and shares Junior ISA. The major disadvantage of a Junior ISA is that the funds are automatically transferred to the control of the teenager on their eighteenth birthday, something not all prents would feel comfortable with. Whilst the Junior ISA can minimise any potential tax liability on your child’s savings, there are alternatives.
Peter Green, Chief Executive of Healthy Investment, a mutual friendly society, explained: “Tax Exempt Savings Plans are great way of investing a modest sum over a longer period of time to build a sum of money that your child will find really useful.’ Unique to friendly societies, Tax Exempt Savings Plans allow every member of the family to invest up to £25 month and enjoy the proceeds tax free. Peter added ‘The parent or other premium payer decides when the plan commences at what age the policy matures. It could be 17 to help with driving lessons, 18 to help with university costs or 21 to help with that first flat deposit. The important thing is that you decide.’ If parents are serious about building a useful cash lump sum the best way is to commit to a modest amount over a long period of time. Traditionally over an 18 year period stocks and shares have out performed deposit based investments, which make Tax Exempt Savings Plans a useful tool for parents looking to maximise the potential returns and minimise any potential tax liability.
Finally for the serious investor and for parents who really don’t think that they will be able to trust their child with a cash lump until they are older, you can now invest for your child in a Self Invested Pension Scheme. They might not be able to access the funds until they are 55 but for some parents it will be a sensible option when it comes to making investing for children as tax free as possible.
Here comes the legal bit: “Parental Choice Limited is an introducer appointed representative of Healthy Investment which is the trading name of The Rechabite Friendly Society Limited, authorised and regulated by the FSA.” For further details of tax efficient investing for children speak to an independent financial adviser or to find out more about the Tax Exempt Savings Plans and Junior ISAs available from Healthy Investment contact them directly on 0800 731 2422.
- A parents role in helping your children avoid student loans (campbellphilip.typepad.com)
- Student finance: debt, drugs, Isas and mobile phones (guardian.co.uk)
- Saving for college is not just for parents (moneytoolsforlife.wordpress.com)