Family Planning

On the face of it things look pretty grim for the financial wellbeing of our children and grandchildren. By the time they retire the state pension will probably provide limited security and final salary pension schemes will be just a fond memory. Also, the huge debts which have been built up by profligate governments, banks and individuals will need to be serviced and repaid through higher taxes. The start of adult life is typically accompanied by an introduction to indebtedness. Most graduates spend the first decade of their working life paying off the loans that paid for their study. Trying to clear this debt doesn’t make life easy. Pension planning will seem a long way down the list of priorities.

But there are options that allow parents and grandparents to make a real difference to the long term financial well-being of later generations. If you invest small amounts on the child’s behalf you have potentially 18 years or more to accrue a reasonable sum. Given the long timescale, you can afford to be quite aggressive in where you invest – possibly emerging markets, certainly equities.

If for whatever reason you feel uncomfortable investing in riskier but higher reward equity markets, you may decide to accrue some of the money in deposit based investments. Whilst interest rates are low now over the next 18 years the picture could change dramatically. It is worth remembering that you have the flexibility to change your investment strategy as the economic landscape alters.

You could invest in an ISA but not in the child’s name. This means that you are effectively using your annual allowance to accelerate the accrual of capital that you will ultimately gift. Another option is to start a pension plan – it might sound premature but given the woeful shortfall in most people’s pension arrangements such a decision shows intelligent foresight. Furthermore, contributions up to £3,600 per annum will benefit from basic rate tax relief, even if the child does not yet pay tax.

Child Trust Funds are another consideration – as things stand every new parent receives £250 from the government, followed by another £250 when the child reaches the age of seven. Parents or grandparents are able to contribute also, subject to an annual investment limit of £1,200. However, remember that the investment is in the child’s name and only they can access the money at age 18. There is therefore a distinct danger that all those savings could go on a motorbike or a three-month holiday in Ibiza! The same issue arises for those who invest in unit trusts within a bare trust arrangement –ownership of the assets is transferred at age 18 without possibility of reversal. For larger gifts (say £50,000 or more) I would normally suggest use of a discretionary trust. This allows the chosen trustees to control how and when money is distributed to ensure that it is used for the correct purpose.

Perhaps the best solution is to have a number of arrangements running concurrently to cover different things. There are pros and cons to all investment options but the sooner you start , the better the head start you will provide for their adult life.