UK: "Saving Is A Very Fine Thing…Especially When Your Parents Have Done It For You"

Last Updated: 9 January 2012
Article by Smith & Williamson

...especially when your parents have done it for you" Winston Churchill

Junior ISAs Available since 1 November 2011, Junior ISAs are a welcome addition to the range of investment options available for children. As a tax-free savings vehicle they're likely to be attractive to parents as a way of helping to fund future university fees or a deposit on a first property. It's possible for eligible children aged 16 or over to open a Junior ISA themselves, but we expect that most subscribers will be parents or grandparents.

Junior ISAs allow parents, family members and friends to make savings on behalf of a child up to the annual subscription limit. This has been set at £3,600 for this and the next tax year. From 6 April 2013, it will be adjusted in line with the CPI.

They are available for children resident in the UK who were born:

  • on or after January 2011, or
  • before September 2002 and are under 18, or
  • between these dates and do not already have a Child Trust Fund.

Withdrawals from a Junior ISA cannot be made until the child's 18th birthday, when it will be converted into an adult ISA (except in exceptional circumstances).

National Savings

Children's Bonus Bonds from NS&I, the Government-backed savings organisation, allow you to invest for a child's future in their own name. There is no tax to pay on the interest or bonuses. The current 34th issue guarantees a compound rate of return over five years including the fifth year's anniversary bonus of 2.5% AER. The bonds can be cashed in early if necessary, but they should really be viewed as a fiveyear investment. No interest is earned on bonds cashed in during the first year.

The maximum investment is £3,000 per issue and anyone aged 16 or over can invest for anyone under 16. So, bonds cannot mature beyond the child's 21st birthday.

Another option through NS&I is Premium Bonds. The maximum investment is £30,000, but with odds of 24,000 to 1 and a current rate for the prize fund of 1.5%, this may not be a gamble that those investing on behalf of children are willing to take!

Stakeholder pensions

For much longer-term savings, stakeholder pensions for children are an attractive option to help build up a pension pot over time. Funds cannot be accessed until age 55 so clearly this a very different time horizon, but it's worth bearing in mind that the State is unlikely to provide very much in pension terms in the future, so the earlier pension savings starts the better. Starting such a pension for children or grandchildren can be a good way to start them on the savings path, although it must be appreciated that the value of the pension fund can go down as well as up, depending on the actual investment fund that is used.

Up to £3,600 per year gross can be invested on behalf of a child in a stakeholder pension. Tax relief at source is available at the basic rate of 20%, regardless of whether the person paying is a taxpayer, so the amount actually paid is £2,880.

Remember that pension funds are virtually tax exempt as far as the underlying investments are concerned and it's sensible to consider this type of arrangement if you want to make regular payments each year. Over time, this should accrue to a meaningful sum.

Offshore investment bonds

These bonds can be a useful way of providing funds for university fees or a gap year. They can also be used to help fund school fees prior to age 18 by using the annual tax-free withdrawal allowance of 5% of the initial investment. This involves the investment of a capital sum through the medium of an offshore investment bond run by insurance companies, normally based in Dublin or the Isle of Man, and can be in the parent's name. Depending on the investment funds chosen, the value of the investment can go down as well as up and there is a risk that the investor may not receive a return of all the capital invested.

The capital is invested in underlying investment funds selected by the investor. Investments are largely free of tax, other than withholding taxes, which are nonreclaimable. Once the child is 18 the bonds can be assigned to them and, as long as they are non-taxpayers at the time, in most cases it's possible for them to surrender the bonds without any tax liability.

Grandparental gifts

Another very useful way of saving for future school fees, particularly for younger children, is through grandparental gifts.

A capital gift from a grandparent is extremely tax efficient compared to parental gifts, where income above £100 is taxed on the parents. Grandparental gifts, on the other hand, can be invested in the child's own name or within a bare trust as the capital is treated as the child's, so that any income is taxed on the child and any gains are subject to the child's own individual CGT allowance (£10,600 in the current tax year).

Bearing in mind a child will also have a personal tax allowance (currently £7,475), it is unlikely that he or she will in fact pay any tax on investment income unless substantial capital gifts are involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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