Childrens' savings/investments/pensions

justme111

when I was asking about a child having access not at 18 but later I found that a discretionary trust must be created for it(unless I misunderstood somerhing) and solicitor I spoke to was not familiar with those, advised me the charges would be high, no exempt tax status and investment management would be handicapped so I made a conclusion that unless it is a major money(hundreds of thousands) it was not worth it.

bowlhead99

anandp wrote: »

Fair point - but can access to proceeds from bare trusts not be elected to be until an older age?

You can keep the bare trust going for fifty years if you like. You (or grandparents or whomever) would still be the trustee / legal owner of the assets and the other person would still be the beneficial owner and responsible for paying all taxes due as if it were directly their own assets and income and gains, so you would need to keep supplying them the relevant information. And they can ask to dissolve the trust at any time once they're 18 or over.

Some won't ask for the money at 18 because they don't want the money or the admin hassle of deciding how to invest it at that point and would rather the trustee kept it invested in line with the beneficiary's wishes. Others will want it all cashed in immediately regardless of the state of the markets, because they want to buy some go-faster stripes for their electric car, or go on a drinking holiday to the Med.

bowlhead99

justme111 wrote: »

when I was asking about a child having access not at 18 but later I found that a discretionary trust must be created for it(unless I misunderstood somerhing) and solicitor I spoke to was not familiar with those, advised me the charges would be high, no exempt tax status and investment management would be handicapped so I made a conclusion that unless it is a major money(hundreds of thousands) it was not worth it.

A bare trust is simple because the person who is the beneficiary has an absolute right to the money and will get all the distributions out of the assets which the trustee makes. So it's taxed as if it's the beneficiary's own assets.

Meanwhile a discretionary trust is only going to be paid out at the discretion of the trustee. Which means you can't say it's the kid's money, so they can't just have it whenever they like. Unfortunately, as you can't say it's the kid's money, the trust has to pay taxes and doesn't get to use the kid's allowances or exemptions.

I agree, discretionary trusts are only really justifiable for specific purposes where you can justify a high running cost or some tax leakage due to the desire to achieve some other goal with a significant financial or practical benefit.

Alexland

Reaper wrote: »

There are fund management charges of course as there are for all types of active funds. The aren't particularly high though. For example the flagship Scottish Mortgage fund has ongoing charges of 0.44%

Yes the Bailie Gifford Childrens Plan has been quietly processing in my head and I am minded to open one for my 2 yr old son as it would be good to continue investing for him with a small regular contribution after we have added the 2 tax years of Orbis JISA contributions into no-fee units.

Scottish Mortgage is too spicy for my taste but Monks seems to be heading in a good direction since Charles Plowden took over and the 0.59% fee isn't bad for the growth they have been achieving.

I really don't want any more in his name so we would probably go for the non bare trust account and put it in my wife's name as she can take the extra income (not that there is much Monks income) without risking child benefit. The other advantage is that we would not be locked in as we would with the bare trust version if the management quality starts to decline.

Alex.

anandp

Ok so I've explored the options now, and this is the situation before me now.

I'm sold on a JISA being better all round, however, if as parents, we want to build up separate 'pots' for the kids, then it may be cleaner to have the grandparents one in a different investment setup.

That way, the tax benefits accrue through JISA growth anyway, but the grandparents 'pot' can be building on its own, albeit not as tax-efficiently as if it was being done through a JISA.

If JISA's can be split across providers in the same tax year, that may be an alternative route.

Is there anything obvious I'm missing here?

cloud_dog

I'll apologise in advance just in case I'm missing something from your posts, or got the wrong end of the stick but...

Let's deal with the simple stuff first:

anandp wrote: »

If JISA's can be split across providers in the same tax year, that may be an alternative route.

Unlike adult ISAs, a child can only hold one JISA of each type; stocks and shares and cash savings. So you could have two JISA accounts running (one cash, one stocks) but these two accounts would need to share the annual allowance for contributions.

anandp wrote: »

Ok so I've explored the options now, and this is the situation before me now.

I'm sold on a JISA being better all round, however, if as parents, we want to build up separate 'pots' for the kids, then it may be cleaner to have the grandparents one in a different investment setup.

That way, the tax benefits accrue through JISA growth anyway, but the grandparents 'pot' can be building on its own, albeit not as tax-efficiently as if it was being done through a JISA.

Is there anything obvious I'm missing here?

What I am missing is what you are trying to achieve? I think you are trying to decide on the vehicle to use to achieve what you want before you have a clear view as to what you want to achieve.

As I see it you are looking to accommodate the grandparents who want to contribute monthly towards their grand child. What is their view on the use of their money, i.e. would they be happy for their money to go in to an investment (and run the risk of losing some money) or do they simply want a cash savings vehicle for the money? Are they looking for the money only to be accessed at age 18, or are they wanting for their money to be accessible whenever the child wants, if there is something in life they really, really want to purchase (within reason)? Basically what are their thoughts.

The advantages, or not, of a tax efficient vehicle for a child really depends on the amounts involved. But, for S&S over a longer time period utilising the tax efficient vehicle is best.

If you are looking at a cash savings account then unless we are talking many thousands of pounds the interest earned will be tax free (up to your personal interest allowance £1k).

The question I always ask is... Will you be comfortable for your child to have access to (hopefully) these many many thousands of pounds when they turn 18?

My DD is very level headed but even so, I like flexibility in all considerations so, she has:

• a S&S CTF (forerunner of JISA) which we and grandparents contributed to in the early years; nothing since.
• She has a cash savings/bank account (she older now) that she uses for money she earns / receives.
• She has a cash savings account (bare trust) which we add to (she is aware of it but not of the details / amount).
• We have, in OH name, a S&S investment account for the benefit of DD
• We have, in my name, a S&S investment account (funnily enough with BG) for the benefit of DD

For the last two, I manage these from a CGT perspective but both of these accounts are for the benefit of our DD. Depending on how life goes we may simply give her the money or we may retain some or all, or give her money as she progresses through life. The reason or the last one (S&S investment in my name) will be to act as a source of funds to possibly go in to a LISA (maybe a pension).

The way it is set up provides flexibility because no one knows what is going to happen 'n' years down the road.

Reaper

Alexland wrote: »

Bailie Gifford Childrens Plan ... we would probably go for the non bare trust account and put it in my wife's name ... The other advantage is that we would not be locked in as we would with the bare trust version if the management quality starts to decline.

Do you mean the Bailie Gifford's admin or the fund managers? If the fund managers you are able to switch freely between the 7 funds they offer without charge. It's a small selection but all well respected.

SouthLondonUser

I have set up a JISA for my little one with Interactive Investor, which is the same broker with which I hold all my other accounts (ISA, trading account and SIPP); this means I don’t pay any additional fixed charges for the JISA, because my ca. £90 per year cover all my accounts, including the little one’s JISA. Do not underestimate the impact of fixed fees when the sums involved are small: eg you may be better off paying a higher % fee with no fixed fee, than viceversa, when the amounts invested are small.

To be honest I do not see the point of a cash junior ISA for very young children; the money will be inaccessible for a very long time, and cash is guaranteed to yield substantially less than a stock and share ISA, which, yes, is riskier, but the long time horizon is ideal to smooth out the ups and downs of the market.

The one thing that freaks me out about the JISA is, as others have said, the risk that my daughter may fritter away the money once she turns 18 – something I would legally be unable to prevent.

Setting up a discretionary trust is, as commented, extremely expensive, and is only really sensible if you have already maxed out the ISA and have seriously large sums of money to give to your children. I guess very few families without a double-barrelled surname do it!

My tax situation is such that holding a separate investment account in my name, to be sure that my daughter doesn’t fritter the money away, would not be tax efficient. Depending on your income and tax situation in general, if this doesn’t apply to you, ie if you’d end up paying little to no taxes on the investments you hold in your name, and you’re worried about little Johnny frittering the ISA away on cars and parties, then it might be something worth considering.

I would only consider contributing to a pension after maxing out the JISA allowance; the JISA can contribute to more immediate needs like higher education, a deposit for a house, etc.

Reaper

SouthLondonUser wrote: »

The one thing that freaks me out about the JISA is, as others have said, the risk that my daughter may fritter away the money once she turns 18 – something I would legally be unable to prevent.

Beware - controversy approching!
Although as said previously a child is entitled to the money from a Bare Trust at age 18 this is not automatic as it is with a JISA.

If the trustees refuse to release the money the child cannot simply write to the investment company pointing out they are of age as the company will ignore instructions from anybody but the trustees.

So the child would have to go to court to either force the trustees to submit or to replace them if they won't.

In practical terms unless your child is both capable and willing to sue their own parents you can choose when to release the money. Indeed Bailie Gifford actually ask what age you plan to run it to (non-binding) so I said 21.

FatherAbraham

aj23 wrote: »

Regarding pension, you can't open one on behalf of your child anyway, and retirement age will probably be in the mid 70s for your child by the same he or she reaches retirement, and a government state pension will not be enough to keep him or her going more than a few months by that time! Leave a private pension until your child is working.

This is completely untrue.

A parent or guardian may most certainly open a pension investment on behalf of the child.

One can find information on setting pensions on behalf of minors at, for example, Cavendish Online (https://www.cavendishonline.co.uk/pensions/) or any of the other reasonably-priced firms mentioned in the Money-Saving Expert article on pension investing: https://www.moneysavingexpert.com/savings/discount-pensions#cheapestfirms

Furthermore, you contradict yourself. If the state's pension will be insufficient, then it would make a lot of sense to begin pension investing now, rather than waiting twenty years before starting, so that the investment has more time to grow.

Warmest regards,
FA