Saving for your children’s future

admin — Thu, 02 Jun 2011 09:26:54 +0000

Every resident person in the UK is entitled to receive a tax free income of £7,475 in the fiscal year 2011/12. And that includes children.

This means that any money invested for a child can earn interest at the gross rate rather than having standard rate tax at 20% deducted by the bank or building society. The process for ensuring this happens is straightforward and the parent or guardian need only complete a tax form R85 to ensure that the maximum interest is earned.

So children already have a head start over tax payers in that they will receive more income for every pound saved. Over time, interest will be earned on this extra amount of interest and the compounding effect means that a much higher sum will be available when the money is needed.

That means that parents or guardians can look for high interest accounts as a way of saving for the future. This may be to help towards further education costs or as a financial nest egg to help with the deposit on a home or the purchase of a major item such as a car. Putting aside a small amount each month from an early age can lead to the build up of a healthy pot when the child matures into an adult.

Until recently the government supported parental saving by providing each child with a £250 bond that had to be invested in a Child Trust Fund. Any family member or friend could top this up to a maximum of £1,200 per year meaning that it could be possible to have a pot of £38,000 or more when the child reached 18. Some parents will still have Child Trust Fund accounts even though the scheme has now bee scrapped for all but a minority of children.

There are other tax free ways to invest on behalf of a child. Index Linked Savings Certificates issued by the NS&I allow up to £15,000 to be invested for three to five years at rates that are guaranteed to stay ahead of inflation. There are penalties for early encashment so this is a home only for money that is not needed until the end of the term.

Premium Bonds used to be more attractive but over recent years there have been changes to the prize pool structure which has reduced the chances of winning. However, any prizes are tax free and there is a chance of the big £1m prize every month. No interest is paid on capital invested so this really is more of a speculative investment.

Even though children can earn their tax free limit before paying tax there are a range of Individual Savings Accounts (ISA`s) aimed specifically at this market. That means that where the annual income is likely to exceed the tax free earnings further can be shielded by investing in an ISA. Since children cannot invest in stocks and shares ISA`s until they reach 16 only half the full limit can be used and must be saved in cash schemes.

Many commercial banks and building societies recognise the importance of getting children to save by offering a range of attractive savings plans. Amongst these are (currently) a number of plans offering between 4.25% and 6% gross interest – much higher than adults can achieve. There are conditions and maximums that can be invested but by using a number of these plans quite a substantial portfolio can be held at inflation beating rates.

Educating children on matters financial is vital if they are to be successful in the challenging world of the future. The financial support that previous generations enjoyed will not be there for the future so encouraging saving and self sufficiency could open doors that may otherwise be closed. Whilst they may not be able to hold a Barclays credit card until they reach 21, building a financial nest egg may help they off to a good start to adult life.

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Financial Planning and Management

admin — Thu, 13 May 2010 13:07:37 +0000

The recent recession has highlighted the need to have a good and clear control over personal finances. Circumstances can change quickly in uncertain times and any significant change in finances can disrupt a once comfortable lifestyle.

Of all the lessons learnt, perhaps the greatest is the need to provide a buffer to carry us through any short term trauma. The exact amount varies between advisers but ranges from between six and 12 months worth of normal monthly living as a cash buffer. With reduced and careful spend this could cover a period of up to 18 months or until you get another job.

Once you have a sufficient cash buffer it is possible to turn to longer term financial planning and management. Children consume cash at an alarming rate – and their ability to consume grows as they do. With the state of the public finances likely to be impaired for many years to come, parents must plan for to cover a larger portion of any further education costs themselves else burden their children with debt for the future. There are a number of tax free saving plans still available for children including the governments Child Trust Fund accounts. These provide £250 vouchers for all children born on or after 1st September 2002 and again on their seventh birthday. With the ability to save £100 per month or £1,200 per year in adhoc payments the fund could grow to nearly £40,000 by the time the child reaches 18.

Many of the benefits of pension saving have been reduced or diminished. Unless you are in a final salary pension scheme the risk of your retirement pension rests with the stock market and your investment skills. There are still some tax benefits to be had with making pension contributions but they are likely to be short lived once a new government gets into power. Make payments into a pension now while values are low and tax benefits remain available.

Finally, avoid the temptation to borrow more than can be comfortably repaid. Use credit cards as a means of convenient payment and not for borrowing. Whilst access to credit remains tight only the better quality customers will have access to lower interest rates – those with less than perfect credit history`s or small deposits will pay a high price for mortgage funding.

The spending years of the 1990s and 2000s are past and we are now entering an era where we need to save money. Whilst not fashionable it will greatly enhance your ability to survive the tough and unstable times ahead.

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Saving for your children’s future

Financial Planning and Management