Will you continue saving for your children?
Child trust funds, RIP. As part of the new government's bid to tackle the debt crisis, it is reducing CTF payments to parents of newborns from £250 to £50 from August, with children from lower-income households receiving £100 instead of £500.
The additional payment children receive when turning seven has been dropped with immediate effect, and from January next year CTF payments will be scrapped altogether.
The five million families who have benefited from the government's £250 vouchers since they were launched in 2005 (backdated for children born on or after 1 September 2002), and set up CTF accounts for their children, will be able to continue to save into these existing tax-free accounts. But they won't receive any further government contributions.
So will scrapping the scheme create a generation without any savings as they begin adulthood? Many experts believe it will have little effect.
Kevin Mountford, head of banking at moneysupermarket.com, says: "The evidence that CTFs helped kick-start saving isn't that convincing.
"According to the government's own data, around one-in-four parents didn't even bother to activate the £250 voucher."
Others disagree: Andrew Hagger, spokesperson for comparison service moneynet.co.uk, believes children with a CTF have a distinct advantage.
He says that contributions of just £22.50 a month plus the two government vouchers, paid into a CTF with 4% growth, would produce a valuable nest egg of £8,000, and give its 18-year-old owner "a much sounder financial footing than previous generations".
For children from the poorest families, the extra money could be even more important.
Even without further parental contributions, a £500 voucher at birth plus the top-up £500 at seven would be worth almost £1,800 after 18 years (at 4% growth). That could help cover university expenses or buy a first car, for example.
Apart from the government contribution, however, the CTF proposition was not ideal. One of the arguments against CTFs was that there is no parental control: once the child reaches 18, the money is theirs, whether or not they're mature enough to use it responsibly.
So, if you take this line of argument, or if your child will miss out on the final months of the CTF voucher, what are the other savings routes available?
Alternatives to CTFs
First, it's important to recognise that whatever type of account you use, even small, regular contributions can mount up over 18 years or so. Take a £20 monthly contribution, starting at birth.
Many people take the view that because the funds are earmarked for such a precious cause they should look to the safety of a cash account rather than play the stockmarkets.
If you pay it into a savings account paying interest at 4% a year and reinvest all the income, you'll have a cash cushion of over £6,400 (before tax) by the time your youngster reaches 18.
Over the really long term, however, stockmarkets have historically outperformed cash by a significant amount: in a stockmarket investment returning an average 7% a year, an investment of £20 a month would grow to almost £8,800 over 18 years.
Mark Dampier, head of research at broker Hargreaves Lansdown, recommends a unit or investment trust regular savings plan for any child, including those still eligible for CTFs.
Investment trust regular savings schemes are popular because they are cheap and have low minimum monthly contributions – as little as £25 in some cases.
They won't appeal to everyone, as their structure is rather more complex than that of unit trusts and also means they can be riskier. However, they do carry the potential for better returns.
Some investment trusts are branded specifically for children – for example, the 2009 and 2010 winner of the investment trust category in the Moneywise Children Savings Awards, Aberdeen Asset Investment Plan for Children.
This gives low-cost access to a choice of 13 highly regarded trusts run by Aberdeen. Other names to look out for include Alliance Trust Savings' First Steps, which offers access to around 4,000 investments, and the F&C Children's Investment Plan.
But there's no reason why you can't use a non-branded investment trust or unit trust savings scheme.
"Whether you take out an investment trust or a unit trust really depends on where the best investment opportunity lies – choose the fund run by the person you consider to be the best manager," says Dampier.
How to open the account
By law, children can't hold stocks and shares investments in their own name until they reach 18, but you can do it for them.
One possibility is to open an account in your name, but 'designate' it to your child simply by adding their name or initials after yours on the application form.
The money remains yours, so you can decide when to hand it over to your child, but you will also be liable for any tax.
As Peter McGahan, managing director of Worldwide Financial Planning, says, the government is planning to increase capital gains tax from 18% to bring it in line with income tax (that could mean up to 50% for some people), so you need to be aware of potential tax considerations.
McGahan says that it's possible to get around this by setting up (or transferring in) the child's account within a parent's tax-free individual savings account, if you haven't fully used the annual £10,200 ISA allowance.
This makes less sense for wealthier parents who can utilise the whole ISA allowance each year.
As children can have a cash ISA from the age of 16, you should ensure you use your children's allowance too once you've used yours.
The other route to follow is to set up a 'bare trust', with the child as beneficiary and you (or someone else) as trustee, responsible for the investment until they're 18.
But although you'll be better off in tax terms, it does mean the child can access the investment any time after they're 18.
The tax situation on children's investments depends on who made the gift in the first place. For gifts from everyone except parents, any tax generated by investment income or capital growth is treated as the child's and set against their personal allowance.
However, if a parent gives money, any income of more than £100 a year is treated as the parent's. So it's sensible to avoid income-producing investment choices.
Another alternative, says McGahan, is for parents to save into an offshore bond and assign it to the child at a certain age.
"When they encash it, they will have the gain assessed against their income in that year, so there'll be no tax to pay if the gain is less than their personal tax allowance [£6,475 in 2010/11]," he says.
Overall, then, there are plenty of alternative options to choose from if you want to save for your child. As a helping hand for youngsters growing up in poorer families, however, CTFs will be sorely missed.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
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.
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.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.