What is the best way to invest £5,000 for my eight-year old daughter?
She already has a child trust fund (CTF), into which I invest £100 a month. The CTF is currently worth £15,000. Should I invest the extra money in another fund until my daughter is 25 or invest the money in a pension for her?
If I invested the money in a pension for her, I would be able to put in £3,600, once the basic-rate tax relief was added. Would that be the best option? And how do I go about running the pension when my daughter is older?
"The maximum amount you can deposit into a CTF this year is £4,080. As you are paying in £100 a month (£1,200 over the year) you could invest £2,880 of your £5,000 into the existing CTF.
The balance could then be paid into a stakeholder pension for your daughter. Tax relief would increase that amount to £2,650 and it would be able to grow free from income tax or capital gains tax. The 20% tax relief your daughter would receive on that pension contribution is hugely attractive.
But be aware that the money would be locked away for a very long time. Your daughter would automatically gain control of her pension at 18 – meaning she would be able to choose how it is invested – but she would not be able to gain access to the money until she is 55.
If that concerns you, consider paying for an independent financial adviser to help you."
Mark Hibbit is a chartered financial planner at Sovereign Independent Financial Advisors.
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pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
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.