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News
Building financial foundations
There are now two really tax efficient ways to give grandchildren, or even unrelated individuals, a valuable nest-egg for the future.
The child trust fund (CTF) was introduced with effect from 6 April 2005 and every child born on or after 1 September 2002 benefits. The government pays £250, once at birth in the form of a special voucher for each child, and then again when the child reaches the age of seven. If the voucher is not invested within a year, HM Revenue & Customs will open a stakeholder account on the child's behalf.
The tax treatment of the CTF is very like an individual savings account. Any growth on the fund is tax free (apart from nonreclaimable tax credits on dividends), and there is no tax on any profit when the child becomes entitled to the fund at age 18. The growth in the fund does not have to be reported to the tax authorities on a tax return - making the whole process very simple.
Grandparents (or anyone else) can also contribute to a CTF where the funds will benefit from these tax privileges. The maximum contributions are £ 1,200 a year to each CTF.
When the grandchild becomes 18 he or she may well be able to find a good use for the cash. For example, the CTF could be used to cover a substantial part of the costs of going on to higher education. Alternatively, the taxfree fund could be used to finance the deposit on a house, or even to help start a business.
Personal pension arrangements
But there is also a highly tax efficient way for grandparents, or other family or friends, to help build up finds for the long term. That is to invest in a personal pension arrangement for the child. The fact that the beneficiary will not be able to access the benefits until they reach the age of 55 might seem like a major drawback - for example, compared with the CTF or other gift programmes, but it is
because of the length of time that the funds are invested, combined with the tax privileges given to pensions, that the long-term benefits are likely to be so valuable.
Uplift and growth
The great advantage of making a pension contribution is the tax position. There is tax relief on the input so that the grandparents can pay up to £2,880 into the plan, but the government then tops it up to £3,600 with £720 of tax relief. That is an immediate uplift of a quarter of the net contribution. The funds then grow in a fund that is largely tax free apart from the non-reclaimable tax credits on dividends. When the beneficiary wants to draw on the funds - after they reach the age of 55 years - up to a quarter of the fund will be free of personal tax and the rest must be used to provide a taxable lifetime Income, which is generally paid as an annuity.
Remember the old adage that the sooner you start contributing to your pension, the greater the potential benefits. The trouble is that most people simply cannot afford to make pension contributions in their 20s, so making contributions on behalf of children during their childhoods and even into their teens provides a wonderful financial underpinning for the rest of their lives.
A grandparent could spread any amounts they were prepared to invest between the CTF and a personal pension arrangement to achieve the nest-egg they would like for their grandchild or grandchildren.
Levels and bases of, and reliefs from, taxation are subject to change. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested.
There are now two really tax efficient ways to give grandchildren, or even unrelated individuals, a valuable nest-egg for the future.
The child trust fund (CTF) was introduced with effect from 6 April 2005 and every child born on or after 1 September 2002 benefits. The government pays £250, once at birth in the form of a special voucher for each child, and then again when the child reaches the age of seven. If the voucher is not invested within a year, HM Revenue & Customs will open a stakeholder account on the child's behalf.The tax treatment of the CTF is very like an individual savings account. Any growth on the fund is tax free (apart from nonreclaimable tax credits on dividends), and there is no tax on any profit when the child becomes entitled to the fund at age 18. The growth in the fund does not have to be reported to the tax authorities on a tax return - making the whole process very simple.
Grandparents (or anyone else) can also contribute to a CTF where the funds will benefit from these tax privileges. The maximum contributions are £ 1,200 a year to each CTF.
When the grandchild becomes 18 he or she may well be able to find a good use for the cash. For example, the CTF could be used to cover a substantial part of the costs of going on to higher education. Alternatively, the taxfree fund could be used to finance the deposit on a house, or even to help start a business.
Personal pension arrangements
But there is also a highly tax efficient way for grandparents, or other family or friends, to help build up finds for the long term. That is to invest in a personal pension arrangement for the child. The fact that the beneficiary will not be able to access the benefits until they reach the age of 55 might seem like a major drawback - for example, compared with the CTF or other gift programmes, but it is
because of the length of time that the funds are invested, combined with the tax privileges given to pensions, that the long-term benefits are likely to be so valuable.
Uplift and growth
The great advantage of making a pension contribution is the tax position. There is tax relief on the input so that the grandparents can pay up to £2,880 into the plan, but the government then tops it up to £3,600 with £720 of tax relief. That is an immediate uplift of a quarter of the net contribution. The funds then grow in a fund that is largely tax free apart from the non-reclaimable tax credits on dividends. When the beneficiary wants to draw on the funds - after they reach the age of 55 years - up to a quarter of the fund will be free of personal tax and the rest must be used to provide a taxable lifetime Income, which is generally paid as an annuity.
Remember the old adage that the sooner you start contributing to your pension, the greater the potential benefits. The trouble is that most people simply cannot afford to make pension contributions in their 20s, so making contributions on behalf of children during their childhoods and even into their teens provides a wonderful financial underpinning for the rest of their lives.
A grandparent could spread any amounts they were prepared to invest between the CTF and a personal pension arrangement to achieve the nest-egg they would like for their grandchild or grandchildren.
Levels and bases of, and reliefs from, taxation are subject to change. The value of investments and the income from them can go down as well as up, and you may not get back the original amount invested.