Your family finance questions answered
Q: I am a single mum of a 16-year-old who has just started college. What help is there for us? I am on benefits and get tax credits for my son. The total I receive is £53.76 in tax credit and £20 child benefit. But is this all the help I can get for him?
A: Frances Walker is spokesman for charity the Consumer Credit Counselling Service
Until your son reaches his 20th birthday, as long as he remains in relevant full-time non-advanced education, then the main benefits you’ll be eligible for are child benefit and child tax credit – and you already receive the maximum amount.
The other benefit your son may be eligible to claim is the education maintenance allowance, which is payable directly to him and is worth up to £30 per week – find out more on the Money to Learn website.
Without a fuller picture of your financial circumstances it’s difficult to suggest which, if any, other benefits you may be entitled to, though you may want to investigate whether you can claim council tax benefit (payable to households on a low income) or a second-adult rebate if you are the only adult over 18 in the household.
There may be other benefits or tax credits available to you, but you’ll need to provide more background information. If you want to see if you are entitled to more benefits, see the Directgov website, which gives generic financial advice on most issues, including an extensive section on benefits entitlement. The website also includes a handy calculator, called ‘Benefit Adviser’, that you can use to check your benefit entitlements.
There are also a limited number of welfare and educational grants available from charitable trusts that are worth checking out. To find out if you qualify, go to turn2us.org.uk. It contains a database of over 3,000 funds, with an easy-to-use tool that helps you find the best match between your needs and the funds available.
If you want more in-depth, tailored advice, it could be worth your while
to contact the Consumer Credit
Counselling Service, which has a
specialist centre for advice on benefits.
Q: My sister died a few years ago and left some cash for her son. As my sister was not married she asked me to invest it for him. I currently have it invested in a high street building society, however I would like to put the money in trust until he reaches 21.
How do I set up a trust? Can the money remain where it is in the building society and still be in a trust? The particular society the money is in offers a cash card once the child reaches 11 years; he has just reached 11 but I don’t feel that giving him access to the money is a good idea.
A: Philip Pearson is a partner at P&P Invest in Southampton
A trust is an arrangement whereby you look after an asset for the benefit of someone else. Although no formal trust has been established, you are already undertaking this responsibility in operating the building society account for a minor.
Under such a provision the account will pass from your stewardship to your nephew upon him reaching age 18. The same is the case for investments for a minor unless they are arranged within a trust that specifies a later age.
The points that need to be considered in how best to maximise the capital over the next 10 years are: where to invest and how to control the arrangement. Cash over the long term has shown to provide a very poor return against inflation.
Low interest rates mean there is little point in using a deposit account unless you have the need for capital in the short term. I therefore advise you to consider alternative forms of investment, such as unit trusts, OEICs or investment trusts, or alternative assets such as corporate bonds, commercial property and shares.
If you are happy that the investments are inherited when he turns 18, a formal trust would not be required, with you being responsible for the administration of the funds over the next seven years. If you are adamant that your nephew should not inherit until age 21 then you will need to arrange a trust through a solicitor.
Trust planning can unfortunately be a complex matter so seek further advice before investing.
Q: My wife and I are trustees for a sum of money bequeathed to our children by my mother. Under the terms of her will, once the children turn 21, they will each receive approximately £30,000.
Our daughter was 21 in August and has just left university. She intends to work for a year and then go travelling. At the moment, she says that she does not want access to this money, but of course we can’t be entirely sure that her plans won’t change.
My son will be 21 in January 2012. He is completing his A-levels and will be going to university later this year, probably on a four-year course, which includes a one-year work placement.
What do you think is our best option – to pay off our children’s university loans for them; invest in a property for their future; put the money into fixed-rate interest
accounts or bonds; or invest it in the stockmarket?
A: Charles Hutton is a partner at Speechly Bircham
The answer to this question will depend on how the trust is worded. However, as trustees, you will have quite a lot of flexibility over how you invest the trust assets and also over whether or not you make payments to your children before they reach the age of 21. Furthermore, it may be possible to defer the age at which your children become entitled.
Generally, the options are likely to be as follows. Firstly, you could invest funds on behalf of your children, until they reach 21. You will be able to invest in all or any of the following: savings accounts, bonds, and stocks and shares.
The trust may be worded so that your children are entitled to any income from the investments, although given the amounts involved, the amount of income may not be very great.
Your second option is to buy a property for the long-term benefit of your children. But one potential disadvantage in this is that if, for example, your daughter changes her mind and wants access to the money, it may not be possible to pay it to her without selling the property.
If, as is likely, the trust gives you the power to advance money to your children before they reach the age of 21, then you could use it to pay off their university debts on their behalf.
Remember that trustees are
obliged to consider the suitability of
investments and the need to diversify them. You will also need to consider the tax position. If the trust assets are invested in almost anything other than cash, there may be capital gains tax implications if, for example, the investments are later sold at a gain, or when your children become entitled to their money.
It would be worthwhile seeking professional advice to clarify all these points.
Q: My 24-year-old son changed his job last January. He used to work for a local authority in the UK (and so has a deferred pension). However, he has now taken up employment with a Canadian company, and he spent most of the last tax year working for this company in Spain.
In this tax year, he’s working for the company in Spain again, and then in Portugal, Germany and
Russia, before a spell back in the UK early next year. After that, he will probably still be working abroad. The company pays his salary into his UK bank account.
The questions that are surfacing relate to the income tax and social taxes levied by the countries he’s working in – how much tax is
recoverable, what UK tax liabilities does he have, and where should he save his money until he returns to the UK for a longer period?
He holds a cash individual savings account, but has not subscribed to it this tax year, and he also has a stakeholder pension he started before his current career began. Can he still operate an ISA or pension, or would a standard savings account be better?
A: Caroline Hawkesley is a certified financial planner and director at Evolve Financial Planning
The questions you ask may look very specific but, in fact, they could apply to many other readers, so I’d like to try to answer you in general terms.
Something that many people don’t pick up on is that if you only work in the UK for part of the tax year – perhaps you’ve moved abroad or maybe you have a gap between jobs – there is every chance that you have paid too much tax and are due a rebate. But it’s up to the individual to claim this.
The best way to reclaim tax is to look at your P60 and see what tax has been deducted during the year. Remember that tax is deducted through the PAYE system on a monthly basis, on the assumption that you will be working for 12 months in the year. It should then be pretty easy to calculate how much tax you should have paid. If you find that you’ve overpaid, speak to your local tax office and arrange a refund.
Other countries will operate similar systems, so the first step should be to speak to your overseas employer to see if it can guide you on what action you should take.
To save into an ISA or a pension, you have to be a UK resident who is ordinarily resident in the UK, or a non-resident Crown employee working overseas and subject to UK tax on earnings. More information can be found at the HM Revenue & Customs website.
You or your son should speak to your local tax office if you are in any doubt about your son’s circumstances.
Q: I opened a stakeholder Child Trust Fund with HSBC for my daughter three years ago, but since then its value has plummeted. I know that there’s always a risk when investing in the stockmarket, but is it worth sticking with HSBC’s fund for the long term, or should I change to another provider or even swap it to a cash-based CTF?
A: Nick McBreen is an independant financial advisor at Worldwide Financial Planning
Your concern over the falling value of your daughter’s CTF, while understandable, must be kept in perspective. The returns from equity-based CTFs have followed the huge drop in market values during the global economic turmoil last year, but you should bear in mind that an investment into a CTF is for the long term. Having said that, I’m confident that equities will recover and values will be rebuilt in the medium term.
Your daughter’s CTF is invested in HSBC’s UK Growth and Income fund, so the future growth potential for your child’s account will depend almost entirely on the fortunes of the UK economy over the coming years. This is the problem that comes with putting all your eggs in one basket.
I suggest that you consider transferring the fund to another provider that offers a wider investment choice. But be aware that there may be charges if you move accounts, particularly for non- stakeholder plans. One alternative is the Children’s Mutual. Its non- stakeholder product includes the particularly good Invesco Income fund.
Another alternative is to look at some online CTF offerings from The Share Centre. Another key point to remember is that your daughter’s CTF can be topped up with up to £1,200 every year. With markets at very low
valuations, now is an excellent time to do this – it could add up to a significant sum by the time she turns 18.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Child tax credit
A scheme started in 2003 that sought to replace a raft of other tax credits and benefits, the payout depends on the number of dependant children in a family, and its level of income. The amount of credit is reduced as income increases. It is payable to the main carer of a child, usually the mother, and is available whether or not the recipient is working.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).