A generous gift

Rascal_Art

My two year old son was very fortunate to be given a cheque for £5000 on his recent birthday. As you would expect, this means nothing to him, but it has given me a bit of a headache. How to best invest it?

I have already opened a stock market based CTF All-Share tracker with F&C, which receives an additional £25p/m. This account is 18 months old

He has had an index-tracking Stakeholder pension with Scottish Equitable opened through Cavendish, since he was 6 months old, receiving £32p/m.

He has a tax exempt cash savings account with Nationwide, which receives any small contributions from relatives and £5p/m pocket money from me.

He also has £2000 of Premium Bonds, which were given to him at birth.

The donor has said that they would gladly replace the single cheque with multiple cheques to the same value if I want to spread the money around.

What would be best to do with this money?

napoleon

A 6 month baby with a pension. Wow, that's scary.

Reaper

Yes, and the pension contributions look on the high side considering the early start.

As you are investing for the long term I'd favour the stock market rather than savings accounts. You already have 2 UK trackers so I'd avoid those. Can't really make specific suggestions as I have no idea about your attitude to risk etc but I'd be looking to invest abroad, a global fund. Asia looks good now but if you go for a specific area you may need to move it from time to time.

jamesd

The F&C international option in the CTF is a better long term choice than the All-Share tracker IMO. If it's still within the limits you might consider adding the money to that over time. Similar suggestion for the Scottish Equitable pension, some international interest would be a good thing. Buying equity-based investments regularly over the next two years is likely to be a good long term choice so you might ask for a standing order or two for that.

For the lump sum you might consider using a fund account and buying the investments in that, then gradually moving them into the CTF and pension.

For an investment choice you might consider the RIT Capital Partners investment trust, the Rothschild family fund.

If the purpose is to avoid inheritance tax then a standing order is possibly helpful because it's likely to be seen as payments from income and not subject to the gift limits even if the giver dies within seven years of the gift.

Calchas

Reaper wrote: »

Yes, and the pension contributions look on the high side considering the early start.

Why are they? Surely earliest and most is best?

I'm not looking for an argument Reaper, just an understanding of your thoughts. :beer:

Calchas

napoleon wrote: »

A 6 month baby with a pension. Wow, that's scary.

Reaper

Calchas wrote: »

Why are they? Surely earliest and most is best?

I'm not looking for an argument Reaper, just an understanding of your thoughts.

I played with an online calculator certain that it would back me up - and it didn't! so I've got to take it all back. Of course it all depends on the assumptions made. I imagine you will be expecting the child to get a work and state pension in addition so you do not need to cough up the full amount yourselves but I'd expected the figures to come out better than they did.

cloud_dog

Rascal_Art wrote: »

My two year old son was very fortunate to be given a cheque for £5000 on his recent birthday. As you would expect, this means nothing to him, but it has given me a bit of a headache. How to best invest it?

I have already opened a stock market based CTF All-Share tracker with F&C, which receives an additional £25p/m. This account is 18 months old

He has had an index-tracking Stakeholder pension with Scottish Equitable opened through Cavendish, since he was 6 months old, receiving £32p/m.

He has a tax exempt cash savings account with Nationwide, which receives any small contributions from relatives and £5p/m pocket money from me.

He also has £2000 of Premium Bonds, which were given to him at birth.

The donor has said that they would gladly replace the single cheque with multiple cheques to the same value if I want to spread the money around.

What would be best to do with this money?

Rascal, perhaps you want / need to give some thought to the implications of the gift inline with the other financial products / benefits your child already has. I'm thinking that they child will be comming in to probably a lot of cash when they are 18, earlier for the savings accounts.

jamesd

Just for interest here are how the pension payments work out, using after inflation growth so all numbers are in today's money.

Assuming 4% after inflation growth, 40 per month after tax credit, contributions to age 18 only, then no more. Pot value at 18: 12500, 6% income 753. Pot value at 55: 53600, 6% income: 3215. Pot value at 70: 96500, 6% income: 5790.

Same assumptions, continuing to pay in 40 a month after 18. Pot value at 55: 93600, 6% income: 5615. Pot value at 70: 178000, 6% income: 10700.

If growth was 7% after inflation the pot size at age 55 after stopping contributions at 18 would be 206500 for a 6% income of 12380. Continuing the 40 a month contributions would give a pot of 286000 and 6% income of 17170.

So the current pension rate and a fairly conservative growth rate isn't enough to pay for retiring at 55 but it's a very good start. At a more optimistic growth rate and with ongoing contributions it's enough to allow a decent early retirement at age 55.

If you want to know the effects of increasing the contributions you can just multiply the results by the change in contribution. So doubling it from 40 after tax relief to 80 would double the 4% growth age 55, 6% income after making no payments beyond age 18 from 3215 to 6430.