Investment funds for your kids' financial future
This summer, parents will have been starkly reminded just how expensive young children can be. But the price tag that comes with raising a child goes far beyond holidays, days away and
Research from insurer LV= shows that the average cost of raising a child in the UK, from birth to the age of 21, is now a staggering £231,843 (this doesn’t include private school fees, although it does take into account associated school costs as well as university fees).
It also points out that the cost between the ages of 18 and 21, the university years, comes in at £53,445. As such, coming up with a savings plan for your child’s future, sooner rather than later, comes highly recommended.
Luckily, there is no shortage of options. One of the most popular is the Junior Isa (Jisa), where you can have a plan that is either in cash or stocks and shares, or even a combination of the two, and no tax is payable on any gains. The downside is that you are limited to saving £4,080 for the 2016/17 tax year. In addition, when your child turns 18, the cash is theirs and there is no guarantee they will spend their savings as you would like them to.
However, you do not have to take out a plan that is specially designed for children. These schemes come with their own set of attractions and caveats. If you want more control, you could start up a bare trust or open a designated account as an alternative, or to complement, any savings plans you already have in place. You can also put away as much as you want.
If you want to give your savings plan the best chance to grow, investments – as opposed to cash savings – are likely to be your best bet. We look at a variety of funds to suit all investment tastes, which could help give your children or grandchildren get a serious financial head start in life – and one way to perhaps leave them the ultimate financial legacy.
Schroders QEP Global Core (five-year total return: 76%)
Recommended by Chase de Vere certified financial planner Patrick Connolly, this is what Schroders describes as an ‘all weather’ fund, which aims to offer investors the potential for outperformance across a broad range of market environments.
Mr Connolly says: “The team takes a very disciplined approach to managing risk and sticks closely to a very structured process. It also has a low charge of just 0.4% per annum.”
Troy Trojan (five-year total return: 28%)
Laith Khalaf, senior analyst at fund broker Hargreaves Lansdown, tips Troy Trojan as another good pick for the risk-averse. This is a multi-asset fund, which means investors get exposure to shares, as well as other asset classes, such as bonds and even gold. Given the wide mix of assets it invests in, the fund comes with a higher annual fee, or ongoing charges figure (OCF) of 1.05%.
Mr Khalaf says: “The manager takes a highly flexible approach and while he looks to deliver strong returns, he also aims to protect investor’s cash during tougher periods.”
Vanguard Lifestrategy 40% equity (five-year total return: 47%)
Candid Financial Advice founder Justin Modray cites Vanguard LifeStrategy 40% Equity portfolio, which, as its name suggests, has 40% of its assets invested in shares from around the globe and 60% in less volatile bonds. It also comes with a very low OCF of just 0.24%.
Mr Modray describes it as “a straightforward and low-cost way to invest in a range of global shares and corporate bonds”.
CF Woodford Equity Income * (up 26% since June 2014 launch)
For someone willing to take on a more ‘medium’ level of risk, Mr Khalaf suggests the CF Woodford Equity Income fund, which carries a 0.75% OCF.
He says: “Its manager, Neil Woodford, has an exceptional track record in managing peoples’ money and the fund provides a good core holding to UK blue-chip companies.” Mr Woodford invests in dividend paying firms – that is companies that share profits with investors – and these payouts can be reinvested to help boost growth, which can prove a major boon to performance over the long term.
HSBC FTSE All Share Index (five-year total return: 40%)
Passive funds, which simply echo the performance of a particular market, are typically the most cost-effective way of investing, and for those looking to take such a route, Mr Connolly highlights this HSBC vehicle.
He says: “It aims to track the performance of the FTSE All Share Index, so the largest holdings will always be in the biggest companies listed on the London Stock Exchange and include the likes of Royal Dutch Shell and BP. It has an annual charge of only 0.07%.”
Rathbone Global Opportunities (five-year total return: 82%)
Chelsea Financial Services managing director Darius McDermott backs Rathbone Global Opportunities, which carries a 0.79% OCF. He says: “Its manager has a bias towards smaller companies, but he sticks to developed world stocks and avoids riskier emerging markets. This fund ticks over really nicely and has a very strong track record.”
JPMorgan Emerging Markets (five-year total return: 13%)
For those happy to shoulder a greater amount of risk in a bid to reap higher rewards, Mr Connolly tips JPMorgan Emerging Markets, which invests in companies, based in the developing economies of India, Brazil and Indonesia, among others.
He says: “This is perhaps as close as you can get to a pair of safe hands in what is a very volatile investment sector. The team seeks high-quality companies which have good growth prospects.” The portfolio comes with an OCF of 1.18%.
Marlborough UK Micro Gap Growth * (five-year total return: 89%)
Marlborough UK Micro Cap Growth, which has a 0.8% OCF, is another of Mr McDermott’s key picks. He says: “While investing in smaller companies is more risky, the portfolio is heavily diversified with more than 200 holdings and it has been one of the top performers among its peer group since it launched in 2004.”
Stewart Investors Asia Pacific Leaders * (five-year total return: 61%)
Mr Khalaf also highlights the Stewart Asia Pacific Leaders as a portfolio suited to the more intrepid. He says: “The vehicle invests in a higher-risk area of the world, but it also has the potential to deliver higher rewards.”
Currently, the fund, which comes with an OCF of 0.9%, has investments in the likes of Japan, Taiwan, the Philippines and South Korea.
Open a pension
Starting a retirement plan for your newborn may seem a bit left field but, given the associated benefits and the time it has to grow, it could be a very sound investment. This is largely because your child will not be paying tax on it. Plus when you add money, the taxman will top it up by 20%. In other words, to save £100, you only need to put away £80, and you can save a maximum of £3,600 a year, so to hit that limit you only need to put in £2,880.
As the rules currently stand, pension savers cannot access their pot until they reach 55, so it is very unlikely to help them buy their first house, but that is where a Jisa could help.
In terms of what pension to choose, Mr Modray recommends a stakeholder plan or a self-invested personal pension (Sipp).
He says: “A stakeholder offers a limited selection of funds in which you can invest, but they are very cost effective and straightforward.” He notes Aviva’s stakeholder scheme, which charges a maximum of 0.55% a year. But if more flexibility is what you are after, he suggests Fidelity’s Junior Sipp. “It offers a much wider range of funds to choose from and charges just 0.35% a year for the account, but you will need to factor in the underlying costs of the portfolios you invest in too.”
What are bare trusts and designated accounts?
Trusts – and the rules that surround them – can be complex, but bare trusts are quite straightforward. When you put something into a bare trust, while the assets are held in your name, assuming you are the trustee, you no longer own them; they are instead held for the benefit of the specified beneficiary – for example, your child or grandchild. However, they cannot take legal ownership of the assets held in the trust until they reach age 18, or age 16 in Scotland.
A bare trust can a hold wide range of assets and you can add to it as you see fit. Setting up a bare trust can be tax efficient too. The tax from income or gains on assets held in a bare trust will usually fall on the beneficiary, the exception is where a parent makes a gift for their child and the income/gains exceeds £100 a year when the parent will pay the taxman.
Also, anything you put into a trust will be considered a ‘potentially exempt transfer’ for inheritance tax (IHT) purposes and therefore will not be included in your overall estate, provided you live for at least another seven years after you make the contribution. To set one up, you typically have to fill out a form, which should be provided by the investment firm you are dealing with.
With designated accounts, there are important differences to be aware of. When you open a designated account, the investments are held in your name but you indicate that they will be passed to the child when they reach age 18. But while you may intend to hand over the money, you are not obliged to and can hold on to it for as long as you want.
Given that the account remains under your control, you are also responsible for any income and capital gains tax liabilities and the money does not fall outside your estate for IHT purposes.
Figures correct as at 25 July 2016.
* Member of the Moneywise First 50 Funds for beginners.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
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.
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.