Friday Highlight  

Financial planning for children: what are the options?

On the grounds that exemptions for other lifetime gifts have not increased in 40 or so years, the exemption for surplus income could prove invaluable when considering Jisa contributions and IHT planning. 

Moreover, grandparents in particular may have a decent amount of surplus income to contribute to a grandchild’s Jisa or future nest egg.

Types of Jisas

As with an Isa, there are cash or stocks and shares Jisas. Whichever version is most relevant depends on the individual's personal situation and the ultimate goal for the funds.

As ever, the choice comes down to attitude to risk, capacity for loss and the desired outcome, which is why seeking advice is so important. 

Are Jisa funds protected?

Any cash paid into a Jisa is protected up to £85,000 by the Financial Services Compensation Scheme, and if a client has more than this limit in the account it is a good idea to consider moving the excess amount into a separate account.

Alternative options to the Jisa

Pension

A child’s pension fund can get children or grandchildren off to a flying start by investing monies over decades. 

Anyone can make contributions into someone else’s pension scheme, and tax relief applies on payments up to £2,880 a year, which means a gross pension contribution of £3,600.

This is basically 'free money' that the recipient will receive in tax relief, and any growth from investment will increase the pension pot. 

Unlike Jisas, this option ensures the child has savings for retirement, as they cannot be accessed until they are 57 (currently) unless they suffer ill health. As the pension is held in the child’s name, no tax liability falls on the parents.

On the flipside, by paying into a pension, restricting access until age 57 will not work out well if the goals of the client are to create a nest egg to fund university costs or a house deposit. 

Trusts

Setting up a bare trust is a flexible way of gifting money to a child without simply passing the funds to the beneficiaries.

Tax advantages of a bare trust can be generous, much like a Jisas, especially if assets are put into a bare trust for someone who is not the person's child (for example, it could be a grandparent).

In this instance, the income and capital gains are taxed as the beneficiary’s income and gains. It is unlikely that a child will have earnings beyond the personal and dividend allowances, and therefore the income and gains could be tax-free. 

On the other hand, if assets are placed in a bare trust by a parent, the entire income is taxed as the parent’s income if the income produced is more than £100.