GPs' children or grandchildren would no doubt like lavish gifts this Christmas, but spending less on presents and putting money aside for their future makes better sense.
As Sir Winston Churchill once said, ‘Saving is a very fine thing, especially when your parents have done it for you.'
Rule number one is to look at the underlying investment and not be swayed by those branded especially for children. If you are considering saving regularly, is this short term or do you envisage building up a sum for a specific purpose? From birth, children have their own income tax and capital gains tax (CGT) allowances, so keep in mind tax-avoidance opportunities.
Although deposit accounts offer security, interest rates are historically low and the consensus is that they are likely to stay low. If the current inflation rate persists, over a long period the money will lose value in real terms. If the savings goal is several years away, you should consider investing in real assets, such as equities, because these offer potential capital growth and a rising income.
Trust fund
Putting £100 a month into a unit trust for a child can produce a handsome fund by the time they become young adults.
Unit trusts can be designated in the child's name while the parents retain control until they are 18 years-old. At this age, the youngster becomes the legal owner with access to the fund. They also become assessable for CGT but have the full annual CGT exemption (currently £8,800) to use.
CGT taper relief is also available and is based on the entire investment period.
Any income generated by a unit trust will be fully assessable on the parent who made the investment if it exceeds £100 in a tax year. However, the income is treated as the child's if anyone other than a parent makes the investment.
To save on potential inheritance tax (IHT), grandparents can also put investments such as unit trust into a ‘bare trust' which will transfer the money to the child at age 18.
GP parents or grandparents not fully utilising their individual savings account (ISA) allowance each year, could consider investing in an ISA for a child because of the tax breaks available to them as investors. This is an excellent way of investing for a specific purpose, such as school fees, and the money can be withdrawn at any time.
Most ISAs can accommodate lump sums or regular payments up to the annual allowance of £7,000 per parent or grandparent.
Investing in a stakeholder pension for a child or grandchild is another good way to invest. If grandparents contribute, it enables them to utilise some of their IHT exemptions. The parents have to set the contract up to allow the grandparents to contribute. They can then either pay lump sums or regular premiums into this plan of up to a maximum of £3,600 per year.
The tax relief applies to the member (the child), not the contributor and the pension benefits cannot be taken until they are 55 years old.
Child trust funds
Under a government scheme, children for whom you are receiving child benefit and who were born on or after 1 September 2002 are entitled to a child trust fund (CTF) voucher of £250 to open a CTF account (see www.childtrustfund.gov.uk).
In cases of lower household income the government makes a second £250 payment to the CTF account when the child reaches the age of seven.
Parents, relatives and family will add to the initial savings up to a maximum £1,200.
You can choose between cash, shares via unit trusts or stakeholder accounts. The last should not be confused with a stakeholder pension and is a safer form of shares CTF as the money starts moving into lower-risk investments such as cash deposits when the child is 13 years old. The child can access their CTFs when they are 18 years old.
Due to lower account charges, stakeholder CTFs can be attractive but these lower margins also mean that the best investment managers are not available to run them.
It is probably best to steer clear of investments called ‘baby bonds'. These are essentially endowment policies with life cover built in. They tend to have very high charges and relatively poor growth
Liz Willis is from the Medical Profession Advisory Division, St James's Place Partnership, 07900 654401, http://liz.willis@sjpp.co.uk
