Junior Isa – Investing in your children’s future

Next month (November 2012) marks the first anniversary of the Junior Isa (Individual savings account), which was introduced as a tax-efficient savings vehicle for children.

Designed as a mini-extension of the existing and very popular adult Isa, the junior version allows parents, grandparents and even family friends to invest cash on behalf of children, or those under 18.  This investment can be in stocks and shares or in cash.

Whilst launched, with good intentions, to replace the Child Trust Fund (CTF) the take-up of Junior Isa’s has been disappointing.  The HM Revenue & Customs (HMRC) reports that only 72,000 such accounts were opened between November 1st 2011 and April 5th 2012, with investment funds therein totaling £116m.  This is a tiny proportion of the eligible number of such children – approximately six million – or less than 2%.

Given that there were 5,500,000 CTF’s opened by April 2011 this looks disappointing, however, at the introduction of CTF’s the then government donated a voucher worth £250 to each child, but since then only 18% of such funds has seen any further investment.

These additional investments totalled £325m, which is only an average of £321 per account. Compare this to the average held in the newer Junior Isa which is £1,614.

So whilst they appear to be less popular, those parents, grandparents and other benefactors are utilising the vehicle to better effect.

Research conducted by Family Investments reported that 92% of parents and children aged under 18 said whilst they thought that it was important to save on behalf of their children 56% of those canvassed had not even heard of a Junior ISA.

Given the tumultuous economic climate we are living through, the need for long-term saving for our off-spring has never been greater.

We have heard much of the “bank of mum and dad’” having to be utilised in later life to fund a child’s education, work placement ,or eventual house purchase, what better way to cushion the shock of this requirement by starting such a Junior Isa now.

Please contact us to see how we can advise you on the best way forward when investing tax-efficiently in your children, grandchildren or family.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.


Maths lessons

Young woman looking at blackboardCarol Vorderman, who once appeared in a video explaining Drawdown when it was first introduced – but is probably better known for her Countdown appearances – has suggested that all pupils should study maths to the age of 18.

This is not an attempt to get everyone to ‘A’ level standard in the subject, but rather recognition that half of us cannot understand fractions, while the other 65% cannot work out percentages.

Sorry about that old joke, but I hope you get the point.

What she is really saying is that it is essential that everyone leaving school should have at least a basic understanding of maths. As an engineer herself, she points out how basic maths is to all walks of life, not just those who want to play with numbers at university, or teach in a school.

Does it matter?
The fact that so many people do not understand the basics of arithmetic is actually critical to society. It is part of the reason why people fail to understand basic economic data, such as the fact that you cannot go on spending more than you earn. According to Credit Action, the average amount owed by every UK adult is currently £29,839 (including mortgages), which is 124% of average earnings. The Office for Budget Responsibility predicts that household debt will be £2,126bn by end 2015, or £84,365 per household.

Of course, having a mortgage is something that helps us own our own homes and is therefore an important part of financial planning. However, if you exclude those individuals who do not have a mortgage, debt is worryingly high already.

Are we cutting state spending too fast?
The other side of the personal spending coin is that the country has also been living beyond its means for decades and we must reduce government borrowing, or the country could lose its AAA credit rating just like the USA has. If we do, interest rates will rise and it will take even longer to clear our debt.

The problem is that innumerate people find it difficult to understand why the coalition is working so hard to reduce the deficit and see it as part of an archaic class-struggle aimed at ‘doing them down’. Nothing could be further from the truth and encouraging people in the public sector to strike against the changes will help nobody – and change nothing. The government cannot be expected to harm the economy just to satisfy a minority of workers whom the rest of us are paying for, in any event.

Could a better understanding of maths help?
The ability to understand percentages and fractions may not per se make a difference to how people manage their finances. The processes involved in understanding maths may, however, help more people to think more logically and clearly about a wide range of issues so that, if they wish to object to the way the government is ‘cutting its coat to suit its cloth’ they can do so with positive alternative suggestions, rather than simply shouting mindless objections. Or rioting in the streets.

Is this relevant to investors?
You can save for the future even if you do not really understand the maths behind various investments. However, having an understanding of percentages and how stockmarket movements are therefore likely to affect your money is something that can make things much easier. It is unlikely that anyone reading this article is not at least comfortable with mathematical concepts. What is important is that we ensure the next generation is too.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.


Pensions for children

The demise of Child Trust Funds was a predicable result of the need for spending cuts by the government. The cost of providing every child with a bounty of up to £500 was simply unaffordable – and in any event benefited better-off families just as much as those at whom the concept was targeted.

So, from 1st January 2011, payments ceased.

What comes next?
As a replacement, the Junior ISA will be able to accept up to £3,000 a year into cash or stocks and shares – which is slightly confusing because 16- to 18-year-olds can actually put up to £5,340 a year into a cash ISA in any event (but nothing into a stocks and shares ISA until they reach 18).

There will, of course, be no government contribution into the Junior ISA, but it will enjoy the same tax exemptions as ‘adult’ ISAs, and those children who have a CTF will not be eligible for a Junior ISA.

It has been calculated for Citywire Money that a newborn child could accumulate £108,000 by the age of 18, assuming a 5% growth rate, which should be more than enough to cover the cost of a three-year university course, even in London, if inflation is subdued in the meantime.

An alternative – or in addition to …
Those wishing to give their children or grandchildren a really good start in life could consider adding a personal pension to their Junior ISA contributions. By putting in £2,880 in addition to the £3,000 Junior ISA investment, a total annual contribution effectively worth £6,600 can be made.

Of course, the pension fund will not be available for a further 37 years, at age 55, but having such a substantial ‘flying start’ could make it possible for young adults not to have to worry too much about pension planning for a few years, while they get established in the workplace.

Are self invested personal pensions an option for children?
Not everyone likes SIPPs because – for smaller funds – they can be relatively expensive. Conversely, as time goes on they can be far more cost-effective than using an insurance company scheme and the additional investment flexibility can be advantageous, not to mention the ability to manage contributions more easily – to suit the person paying them, rather than a computer system.

Equally, the benefits can – later in life – be taken as required by the child including, if there is adequate additional guaranteed lifetime income to facilitate flexible drawdown, quickly to bridge a gap between retirement and the onset of the basic state pension, which could start at any age, by then!

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.



University fees

It is difficult not to have some sympathy for the next generation of university students; or at least it was, until a lunatic fringe took over what was probably intended as a peaceful and perfectly legitimate protest and turned it into a violent demonstration against society in general, under the cloak of criticising the coalition government’s stance on tuition fees.

While the Liberal Democrats are in a difficult position (would they have ever been so rash as to sign ‘that’ pledge, had they had the slightest idea that they might end up in government?) it is worth noting that the increase for most students will not be to £9,000 a year, but to a maximum of £6,000 a year. The higher limit is only for exceptional circumstances and has to be justified, or penalties will apply.

Nevertheless, the increase is sharp and students are naturally concerned about entering the job market saddled with massive debts.

Of course, nothing in life is ever really clear cut. For example, had the previous administration not insisted that 50% of young people should get a university education we would not now have to pay for a plethora of non-academic courses that are really more akin to the old vocational courses provided by polytechnics. It then compounded the problem by paying children up to £30 a week through the educational maintenance allowance to stay on to eighteen to encourage them to get to university.

There is nothing wrong with encouraging disadvantaged youngsters to get a better education, but previous generations would get a Saturday jobs to pay their way through sixth form – is this really no longer possible in today’s job market, or is it that people have simply been educated to expect to have everything handed to them on a plate?

How did we get in this mess?
The problem is that ‘trendy’ thinking has long undervalued the benefits of vocational studies in favour of expensive university courses such as media studies and performing arts … and a quasi-academic approach to such areas as physical education, computer animation and so on. Yet most over-50s achieved university-level qualifications as the result of part time study alongside our professions.

The truth of the situation
The reality of where we are now is that no student will start to pay tuition fees until they have left university and are earning above a threshold figure of £21,000 (compared with the current level of £15,000) and that maintenance grants will be available to anyone whose family income is less than £42,000 a year, with the full £3,250 annual grant being available to those with family incomes of up to £25,000.

But when did demonstrators ever let the facts get in the way of a good scrap?

So what can you do?
Nevertheless, anyone whose children are considering attending one of the older universities – and therefore studying a real subject – will probably encounter the full £9,000 a year fees (what a pity the government didn’t scale back this headline figure for the time being) and could consider ways of helping cope with the repayments when they start.

This could easily be achieved by making ISA investments that provide a tax free income that supplements the graduate’s income to ‘make up’ the amount deducted to repay student loans and fees, when the time comes.

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.


Christmas is coming

If you have yet to enter into the annual ‘uncontrolled spending round’ – also known as buying Christmas presents for the grandchildren – you may wish to consider risking life and limb by giving them something really worthwhile; it may not appeal now, but could be worth hundreds of thousands of pounds later on.

Saving for their future
The fact that Child Trust Funds (CTFs) are effectively being scrapped makes it a little more difficult to help plan for our children and grandchildren’s futures but, to be honest, not very much. It is still possible to put money into existing schemes up to £1,200 for each child and, for those who do not benefit from CTFs, grandparents can continue to build up reasonable sums without exposing the interest to income tax, provided it does not exceed the income tax threshold (although form R85 will need to be completed to avoid deduction of basic rate tax.)

Money given to children by their parents will be liable to tax if the income is more than £100 a year (although at today’s interest rates you would probably need £5,000 in most accounts before this level is payable!) but this does not apply to money given by other adults, including grandparents.

The one downside is that the children can access the cash relatively soon and you may not want this.

A real alternative Christmas gift
What might be of greater interest – at least to those with a view to the very long term – is using personal pension contributions to help given children a real start in life. It may sound strange to consider giving a five-year-old something that he or she cannot get hold of for half a century – especially since CTFs are accessible at age 18 – but there is logic to it.

Anyone who wants to build up a realistic pension fund really needs to start as early as possible. After all, annuity rates are never really likely to recover, because even when interest rates bounce back (as they surely must at some point) life expectancy just seems to keep rising. This means that people will have to sustain themselves for much longer in retirement, unless they want to work much later.

Making a pension contribution of £800 on behalf of a grandchild is worth £1,000 to them and will reduce the need for them to think about pension planning as soon as they start at work; be that at 18, 21 or even later. It will never be a substitute for personal or occupational provision, but the effect of investment growth in an effectively tax free environment means that money invested on behalf of a child could be worth almost unimaginably more later on.

Best to have a tangible present ready for them to unwrap on Christmas Day, or you might become less popular!

For older children …
… giving them the means to start a pension now could help them to understand the need for personal retirement planning. It is a long way off, but if they can be given a head start, to which they add a modest amount each month, they will start a really good habit – and you will know that they cannot get at the money to misuse it while they are too young to understand the implications (unless 55 becomes the new 18).

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.