Investing in your child’s future

For clients wanting to invest for their children’s future in something more adventurous than a child savings account, there are three main options: a Junior Isa, a Junior pension or a Bare Trust investment account.

The purpose of these accounts varies significantly, and there are considerable differences in how they can be accessed, tax treatment, limits on investments and how the accounts are managed.

Children, Win, Success, Video Game, Play

Jisa

Jisas are often the first option that springs to mind when we talk about investing for children. Like all Isas, Jisas benefit from tax-free growth, with no income or capital gains tax to be paid.

This includes when the account is funded by parents, and, unlike some other accounts, even when the income for the year exceeds £100.

Children can have a cash Jisa and a stocks and shares Jisa. It is possible to hold one of each type, and transfers can be made freely from one to the other.

However, unlike adult Isas it is not possible to open a new account of the same type each year and leave the old one open.

If a stocks and shares Jisa is held and you want to pay into one with a different provider then the existing Jisa must be transferred to them first.

Accounts can be opened by the parent or legal guardian of any child resident in the UK aged under 18.

Remember that children born in the UK between September 1 2002 and January 2 2011 were eligible for child trust funds and although these accounts can no longer be opened they can continue to be held until the child reaches age 18.

It is not permitted for a CTF and a Jisa to be held for the same child, however since April 2015 it has been possible to transfer a CTF to a Jisa if the transfer is made as part of the Jisa account opening process.

Subscription limits for both Jisas and CTFs are £4,368 for the 2019-20 tax year.

Junior pensions

Turning to pensions now and the option of setting up a scheme for a child.

This is definitely one for the long game, and primarily used by wealthy clients who have exhausted the Jisa allowance for their offspring.

It is possible to pay in £2,880 a year, which will be topped up to £3,600 under relief at source, even when there are no earnings.

As a registered pension scheme, the investments can grow tax-free and the benefits of compounding will be substantial, given the funds cannot be accessed for a time frame of potentially 50 year or more.

It would usually be the parent or legal guardian who would set up the pension and make the investment decisions, but some providers may allow grandparents or other adult family members to do so.  

Another use for junior pensions is where a child is a beneficiary after a family member’s death and has funds designated to flexi-access drawdown in their name.

Bare trust investment accounts

A child cannot legally own shares, so the easiest way to open an investment account for them is to have a bare trust account.

A bare trust document can be very simple, setting out the initial donor, trustees and who the beneficiary is.

Unlike the other type of accounts we have looked at, a bare trust does not have to be managed by the child’s parents.

They are therefore a popular option for grandparents setting up accounts for the benefit of their grandchildren that they can invest and manage.

Bare trusts also allow withdrawals at any age, as long as it is for the beneficiary’s benefit, so grandparents could invest and make withdrawals to pay school fees as appropriate.

On turning age 16 (18 in the rest of the UK) the child-turned-adult has absolute entitlement to all the capital and income, but it is not an automatic handover to take over managing the assets.

The trustees can continue looking after the fund indefinitely,  but what changes is the now-adult beneficiary can demand the capital and/or income at any time. If they are comfortable looking after their own affairs then the trust effectively ends and it becomes an adult investment account.

As it is not a tax wrapper like a pension or Isa, there is no limit on the amount that can be invested in a bare trust account.

Income and capital gains within the account are chargeable to tax, but are treated as belonging to the beneficiary.

A child has the same personal allowances as an adult, that is personal allowance, personal savings allowance and a starting rate for savings of 0 per cent, meaning up to £18,500 of income a year could be tax free plus a capital gains allowance of £12,000.

One crucial point to be aware of though is that if a parent puts money into the bare trust account and the income exceeds £100 a year (or £200 if both parents pay in), then the income is taxed on the parents.

This is why bare trust dealing accounts are most commonly used for grandparents to make gifts, rather than parents.

If you would like more information on any of the above options, please give us a call.

Over 60s miss out on thousands of pounds of pension savings

Savers over the age of 60 are throwing away up to £1.75bn in pension contributions by opting out of their workplace schemes, according to Royal London.

The mutual insurer analysed its own figures, which indicated a 23 per cent opt-out rate among the over 60s compared with 10 per cent across all other age groups.

According to calculations from Royal London, an individual in their 60s on the average wage paying the minimum pension contribution of 8 per cent would have a retirement pot of just under £14,000 by the time they reach age 65.

Given that pension contributions are made up of contributions from workers and their employer, to which tax relief from the government is added, individuals would only need to contribute about £6,600 of their own money to achieve this outcome.

This means by opting out of their pension each member could be missing out on £7,000 each, the mutual insurer stated.

According to data from the Labour Force Survey, there are approximately 1.1m people aged 60 or over who are in full-time employment, which means more than 250,000 people could be affected.

If each saver stands to lose up to £7,000, then collectively this group could be missing out on as much as £1.75bn in retirement savings by opting out, Royal London added.

According to a pension specialist at Royal London, it is understandable that someone at the age of 60 might think it is too late to save enough to make a difference to their retirement income, but she stressed “they are wrong”.

She said: “Our figures show older workers are throwing away thousands of pounds on retirement income by opting out of their scheme. We would urge anyone thinking of opting out of their auto-enrolment scheme to think twice before doing so.”

If the decision to opt out is solely down to budgetary pressure – not being able to afford pension contributions – then it might be understandable, even if misguided.

But it is more concerning that people opt out because ‘it’s not worth doing’. The problem with that is they will lose both the employer contributions and tax relief.

Royal London maintained, “There is a significant, number of people saying “no” to what is effectively free money. More thought and effort should be put into educating the over 60s as to the very real benefits they’re giving up.”

Retirement Confidence Is On The Rise

I read this little nugget, in an article in one of the technical papers namely Financial Reporter. Good news I thought, but the sting in the tail is that 10% of those polled don’t have any pension savings, just over a third have given no thought to how much they might need in retirement and a quarter don’t know how much money they have set aside.

And that’s where we come in. I was visiting a client last week who 6 years ago fitted that profile exactly. Today, his pension fund stands at over £55,000. As he said to me last week, if it hadn’t been for you, Arthur, I would still have had nothing for my retirement.

The full article in the paper read as follows:

The Retirement Confidence Survey, conducted by Aegon to mark the start of Pension Awareness Week, reveals that people in the UK are feeling slightly more confident about their ability to retire comfortably, than they did two years ago.

Latest figures show just over half now feel confident about their ability to retire comfortably, compared to just under a half in 2017.

However, while retirement confidence appears to be improving, many remain in the dark when it comes to their pension savings and arrangements for funding their retirement.

One in ten (10%) of those polled admit that they don’t have any pension savings.

36% have never estimated their income needs for retirement, putting themselves at significant risk of being unable to maintain their existing lifestyle. While it’s encouraging that this has reduced since 2017 from 43% to 36%, the pace of change needs to accelerate to make a real difference.

A quarter (25%) of those with pension savings said that they don’t know how much they hold in pensions. This is highest among those aged 35 – 54 (30%). And while only 19% of 55-64 year olds don’t know how much they have in pensions at the moment, it’s still significant considering how close they are to retirement.

Steven Cameron, Pensions Director at Aegon, comments:

“It’s encouraging to see an indication of growing confidence over the last two years when it comes to being able to retire comfortably.

“Pensions have frequently hit the news headlines in the last few years. While at times this has been for less good reasons, there have been lots of positive stories such as the success of automatic enrolment and the new retirement flexibilities under pension freedoms which have been built on by initiatives such as the Pensions Awareness campaign from Pension Geeks. All of this has contributed to raising the profile of retirement planning, leading to people taking more interest and action, improving the confidence people have when it comes to being able to retire comfortably.

“But we must remain realistic. Overconfidence carries risks and people mustn’t be lulled into a false sense of security. While auto-enrolment means millions of employees are saving more for retirement, that doesn’t mean they’re on target for the retirement they aspire to or to maintain their pre-retirement standard of living. Furthermore, the growing population of self-employed are excluded from auto-enrolment and can’t rely on an employer to support their retirement funding. Realistically, there’s a lot more required to make sure you’ve saved enough for the retirement you would like.

“It’s also worrying that a significant minority of people don’t know how much they have in their pension. Those in the 30 to 54 age band are in the best position to take action now to make a big difference to their retirement income. Whatever your age or circumstances, finding out more about your pension funds and prospects can only be a good thing.”

Don’t forget that Client I met last week. Maybe I can do the same for you. If you would like a chat, give me a ring. My number is 0141-956 5525.

Have a great week.

Pension Freedoms – Good or Bad?

HM Revenue & Customs’ most recent figures show a total of £21.7bn has been cashed in from pension pots since the freedoms were introduced in April 2015.

There has been a steady increase in the funds being withdrawn year on year with almost five million withdrawals having now been made using the pension freedoms.

There was a slight drop-off in the value of payments made in the past three months but this still amounted to just under £2bn accessed via 585,000 withdrawals – the highest number since records began.

So people are clearly making the most of the freedom and choice regime. But is such unrestricted access to pension funds a good thing? Some commentators say yes, for more than one reason.

Right decision

Firstly, pensions as a concept in this modern world of constant change need trust. Trust in the pensions system has been eroded over the years, rightly or wrongly. You gain trust by trusting others, in this case trusting people with their own money. The government took a bold step giving back control of pension funds to those who have saved their hard-earned money into them when it brought in the freedoms. We are still only a few years in but, while there have been some teething problems and some large sums of money have been withdrawn, it has so far not been the free-for-all that some predicted.

Secondly, the restrictions we faced before the freedoms were causing more issues for those who have built up multiple small pots throughout their careers.

Thirdly, being able to dip into the funds when it suits or getting access to larger sums early on in retirement has helped many who would have been stuck paying off debts while receiving just a small pension annually. The interest saving for a lot of people must have been significant.

Drawbacks

On the flipside of all this, though, the ability to access large sums of money in a single transaction has provided an additional, lucrative target for scammers.

When income was limited, and the norm was regular income for life, and scammers could not access pension funds. Now they can target individuals, coercing them to cash in their funds with the promise of better returns or more exciting investments, only to run off with them (and after they have been taxed as well).

As clients have the right to access these funds, providers may be unaware of what they intend to do with them.

But apart from education and warning, there is little else that providers can do.

There is no doubt about it, pension freedoms need to be embraced. And the government, providers and advisers need to do what they can to educate and protect the public from making mistakes.

Right now, this appears to be working, but only time will tell.

If you would like to find out a bit more, give us a call on 0141-956 5525, or drop us an email to [email protected]

Beware Pension Scams

Pension scams have cost savers a shocking £4bn, according to a Times piece at the weekend which highlighted how cases of mis-selling rose sharply after 2015 – when pension freedom was introduced – while more than 100,000 people transferred out of defined benefit schemes last year.

Don’t get caught out

Continuing down that line, it also says pension transfers leapt from £5.4bn in 2014 to £33bn last year. Despite being warmly received by many, it adds, pension freedoms have been a “boon to scammers”, who have convinced savers to put their money into high-risk investments.

“Pension scams have the potential to be the next big financial scandal,” says former pensions minister Baroness Ros Altmann. “Regulators have failed to respond with adequate urgency and are leaving consumers at the mercy of fraudsters. The fallout risks putting younger people off pensions altogether.”

What we would advise is, beware of Cold Calls regarding Defined Benefit schemes also known as Final Salary schemes. Its illegal to cold call about pensions but it still happens and people still get caught out.

300k Unadvised retirees exposed to drawdown danger

I’ve just been reading a report which said that hundreds of thousands of unadvised drawdown investors are unaware they can scale back or even stop their withdrawals, according to new research from a major pension provider.

In April, the Company concerned carried out an online survey of 2,028 adults aged over  the age of 55 who had accessed their defined contribution pensions since 1 April 2015.

What this survey showed was that 52% of those surveyed did not know they could reduce their withdrawals, and a further 56% were unaware they could stop withdrawing money altogether.

If these figures are reflective of the general population – of which 615,000 are in drawdown – then around half could be exposed to much more risk if stock markets plunge and the value of people’s remaining funds reduces dramatically.

The head of retail platform strategy at the pensions firm, said anyone unaware of the flexible withdrawals provided by drawdown could seriously damage their savings.

‘If investment returns come to a sudden halt, savers need to be prepared to step on the income brakes,’ he said.

‘People who are unaware they can slow down, or stop their withdrawals, could seriously damage their savings, and deplete their pots too soon.’

What concerned me was that the implication of the report was that a huge number of investors were still in the “accumulation” stage of their pensions rather than moving to “decumulation” now that they were in drawdown.  This fact could be extremely likely given that so many were unadvised.

Of course, maybe “accumulation” is the right answer for some.  But if they haven’t taken advice and don’t know about the flexibility afforded by drawdown…

Are you in drawdown? Are you about to go into drawdown? Are you or will you be in the right type of contract? Have you gone ahead and taken income without taking advice?  If this is the case, perhaps the cost of the advice may well be worth the money in the long run.

If you would like to chat to us about your options, give us a call on 0141- 956 5525 or drop us an email at [email protected]  We are always happy to talk.