Many people wish to gift money family and there are a few alternatives to cash as Chartered Financial Planner, Sue Williamson explains.
1. Junior ISA (JISA)
This works effectively the same way to an adult ISA. Up to £4,368 can be saved for a child or grandchild in the 2019/20 tax year. The account must be opened by a parent, however there is nothing preventing grandparents from funding the JISA.
It is perfectly allowable to contribute up to £4,368 per year for any number of children. For example, a couple with three children could contribute £4,368 to a JISA for each child, every year.
JISAs can be held in cash, invested in stocks and shares, or a blend of both.
The child will gain control of the JISA at 16 and will have access to the funds within it from age 18. Besides this, there isn’t any restriction on how or when the monies can be withdrawn.
This is an excellent path for parents or grandparents wishing to gift small or regular monthly amounts to children and grandchildren, as long as they are comfortable that the money can be accessed by the child at age 18, and that they have no control over how the money may be spent.
JISAs are completely free from income and capital gains tax.
2. Pension Plan - held in the name of the child or grandchild
A parent or grandparent can contribute up to £2,880 per year into a pension, on behalf of a child. This contribution will benefit from a 20% tax relief “top up” from HMRC, resulting in a total annual pension contribution of £3,600.
The purpose of pensions is to provide an income in retirement. It is therefore important to remember that the child will be unable to access the pension before age 55 (based on current legislation). Pensions are fantastic long-term savings vehicles, but shouldn’t be considered suitable for shorter term needs like education fees, home deposits, etc.
A pension will benefit from tax efficient growth within the plan, and a 25% tax free lump sum when the child eventually accesses the pension. Bearing in mind the timescales involved, and the power of compound returns, this could amount to a significant sum over such a long period of time.
3. Using a Trust
This type of arrangement can be used to facilitate regular or lump sum investments. There are two main types of Trust:
A Bare Trust allows the beneficiaries, for example, grandchildren, the absolute right to the trust capital and its income. A bare trust requires specific named beneficiaries at the outset with no flexibility for this to be altered in any way. In Scotland, beneficiaries of a Bare Trust have the right to possess the trust assets at 16 (18 in England and Wales).
A Discretionary Trust is useful when the donor wishes to retain an element of control over who will benefit from the trust assets, and when. Unlike a bare trust described above, this type of trust allows the donor to add and alter the beneficiaries at any time.
Care should be taken on which type of trust to use and will depend heavily on the family’s circumstances and objectives.
Although this option provides the greatest flexibility and control, it is also the most complex and expensive of the three options outlined.
The most common investment vehicle within a Trust is an Investment Bond.
Investment bonds are life insurance policies where you pay a single lump sum premium. When you cash in an investment bond, or when the insured person dies, how much you get back depends on how well – or how badly – the underlying investment has performed.
An investment bond has the greatest input flexibility as it is not restricted by any annual or lifetime investment limits. By investing via a trust, the parents or grandparents will have the greatest element of control over the funds, as they can stipulate who should benefit from the bond proceeds and under what criteria they can access the funds.
If you are considering the best options to save or invest for the benefit of a family member, speak to a Financial Planner who can advise on the most appropriate option for you.