My children are about to be given 25k each

menim

My 2 children aged 15 and 9 are about to be given an early inheritance from my mother of 25k each. What can i do with this money to save/invest until they are 18? I would also like them to be able to save themselves towards this and myself put a monthly contribution. Any ideas would be great

MoneySaverLog

Start a pension

They have time on their side and a good way to compound if you do

bowlhead99

MoneySaverLog wrote: »

Start a pension

They have time on their side and a good way to compound if you do

IMHO this plan does not make much sense, because the phrase "they do have time on their side and a good way to compound if you do" can be applied to any investment method.

If they have access to the investment proceeds in five to ten to 15 to 20 years time they will have opportunities to use it on life changing opportunities such as education, travel or a house deposit, OR put it into a pension and take valuable tax relief then.

Whereas the route you're suggesting they take minimal tax relief now - because they're not taxpayers now - and create an asset which a) is taxed in retirement and b) they are denied access to for 40-50 years no matter what hardship besets them.

For the younger one, investment funds inside a JISA would make sense although it won't all fit in one year's allowance. For the part that doesn't fit, you can look outside ISAs at, for example, investment trust plans which often have low-contribution minimums for you topping up monthly.

For the older one, investments are riskier if you expect them to take it out and spend it in only three years time.

But the typical 18 year old does not really have a need for £25k cash, so I would consider speaking to your mother and asking if she's OK with you putting a rule that a large part of it should not be touched for 10 years time for both of them - then they are being treated fairly and equally in that one doesn't get a payout really soon to blow on a sports car while the other has to sit around and watch and resent not having a pony or an iphone or whatever 12-year-olds want these days...

Then that piece can be invested (in funds within JISAs and ISAs and unwrapped) and a smaller piece held in cash savings for a treat or uni spending money at 18, while the majority of it is released at 25 for a house deposit or whatever they think useful at that point of life (which might be further investments or pensions or whatever they want/need).

Just a thought, you said you would like them to be able to save towards this themselves. But if you are ( / your mother is) going to let them have access to the whole lump sum at 18 there is a pretty big dis-incentive to save, because the 25k is a huge amount of money to any teenager that makes their paltry contributions relatively less meaningful.

I know if I was 15 and was going to get 25k in three years time, and I had a tenner pocket-money I was considering spending on a cinema trip or an iphone cover, or perhaps I was wondering about doing some odd jobs to earn the tenner to spend on those things - my thought process would go like this...

"Shall I save the ten pounds in my 'when I'm 18' pot? If I leave it to earn interest along with granny's lump sum, then in two or three years it might turn in to eleven pounds, or maybe even 11.50 - with compounding savings interest or investment returns. So do I want 10 now, and 26,000 later? Or should I forego this instant gratification and keeping up with my friends'social lives and fashions, to have 0 now and 26,011.50 later? Ooh decisions decisions." To any teenager (and many adults) the last three figures of a five figure sum are almost entirely irrelevant and are no tangible 'reward' for their savings efforts over the years.

That is why I would give serious thought to partitioning the money and phasing its release. Have them contribute to the 'cash savings' side of it while keeping the generous lump sum and your own contribution in longer term investments. Obviously run the idea past your mother first as she is expecting the money to be entirely available to the eldest in only three years time. You could still split it and have a pot for cash fun and a car, a pot for uni expenses or starting a trade, and a pot for investment for later in life, which you help them manage.

alanq

Income from a child's savings where the funds originate from a parent is taxed as if it is the parent's income if it exceeds £100. Income from a child's savings where the funds originate from someone else, including a grandparent, is taxed as the child's.

If the grandparent gives you the money and you then invest it, or an account contains funds from a mixture of sources, I foresee possible problems. Perhaps someone who has experience of this would be kind enough to explain how to avoid issues in explaining the source of funds to HMRC.

atush

I would invest the money rather than save in cash. Esp for the younger child.

I would save perhaps 10-20% in cash for the younger (you can use a Jisa) and invest the rest into equities. For the older, depending on what they will do at 18-19 (ie are the planning on Uni?) I might make a different split as 3 years is a bit tight for equities. So maybe save 50-60% in cash and invest the rest for the longer term (ie house deposit etc).

Prothet_of_Doom

I'd tell the 15 year old he gets it at 21 not 18, because..........rant about experience.....

Might I suggest Spread betting the risks, Fixed Rate Bonds, Bonus Bonds and the like, but why not set up a Share Dealing account for each and put £5K into it. with the 15 year you can do this together and weekly buy and sell a small port folio. Do the exact same investment decisions for the other.

I suggest this because I set up a SIPP with £10K a couple of years ago, my wife put £10k into a sensible pension and my 18 year old put £10k into a 4 year fixed rate bond.

I have £20K, wife has £12K, Son Has £1150....

xylophone

Unless a CTF/JISA is being used, keep the funds from grandma completely separate from any money provided by parent.

Keep a record of the source of the gift and advise your mother to keep a record of it with her will.

If you as a parent hold (or are prepared to open) an ISA of your own with Halifax, then the 6% rate currently offered on the JISA might be something to consider for part of the money for the older child.
https://www.gov.uk/junior-individual-savings-accounts/overview

http://www.halifax.co.uk/savings/accounts/cash-isas/junior-cash-isa/

The money is being given now as an absolute gift to your children- you can hold it in bare trust for each child until the age of 18 (16 in Scotland). http://www.hmrc.gov.uk/trusts/types/bare.htm

If neither child is a taxpayer and deposit accounts of some kind are being used ( but bear in mind that rates on deposit accounts are
currently not even keeping up with even CPI inflation), then an R85 should be completed ( but see what happens in this regard - http://uk.virginmoney.com/virgin/savings/learn/childrens-accounts/when the child turns 16).

As this money belongs to your children absolutely, make sure that any account is indeed held in bare trust and not merely as a designated account. See here http://www.sit.co.uk/products/investing_for_children/features/questions_and_answers/ for a clear explanation - this gives details of holding a stock market investment in bare trust.

You could also consider holding a selection of OEICS in bare trust

https://www.hl.co.uk/free-guides/investing-for-children HL will provide the special Bare Trust Forms on request.

If you chose interest bearing funds, the interest can be reclaimed for the non or possibly 10% paying individual - see http://www.hmrc.gov.uk/individuals/savings-income.htm

http://www.hmrc.gov.uk/forms/r40.pdf

http://www.hmrc.gov.uk/taxon/worked-examples.htm

I would not be inclined to use a pension for this money - the children are likely to need driving lessons/car/house deposit etc in the far nearer future.

Reaper

For my son I have split his money into 3
1) CTF (shares type)
2) Investment Trust set up as a Bare Trust for any money gifted to him by relatives.
3) Junior SIPP.

People always say he won't benefit from the pension until he retires but in my view that's a myth. To get a decent pension it is important to contribute in your 20s and 30s which tends to be when you are the most financially stretched and least able to do it. Starting one early means he will have to put much less in during those crucial years than he would otherwise. Besides I love getting "free" money added to it by the tax man. Plus no matter how irresponsible he turns out to be he can't blow it!

skylight

Prothet_of_Doom wrote: »

I'd tell the 15 year old he gets it at 21 not 18, because..........rant about experience.....

.

STRONGLY echo this bit.

DavidMackie

Ditto with Skylight. Even pushing it out to 25 is sensible. Let them earn their own way up to then, and by 25 they MIGHT have an idea what they want to do (set up business etc) and use it correctly. If they don't, they can pay off a uni bill that hasn't accrued much interest

Regarding the investment. This could be a handy place to use the rule of 72 (sorry to those of your groaning to read this!)

Rule of 72 is an old wives trick (lol) to figure out when money will double in value:

basically you divide 72 by the interest rate to see how many years it will take the value to double in.

Great way to quickly assess options.