DIY InvestorMagazine
/
March2014
DIY InvestorMagazine
/
March2014
32
33
JUNIOR ISAOFFERS
TAXEFFICIENCYTOTHE
BANKOFMUM&DAD
According to the Institute for Fiscal Studies, those
born in the 60s and 70s are the first generation since
the SecondWorldWar to be poorer than their parents.
Writes Steve Haysom
Those leaving further education in 2014 face the
prospect of student debt in excess of £50,000, fierce
competition for employment, wage stagnation and
‘gazumping’ has returned to London’s super-heated
housingmarket. According to the Office for National
Statistics there were over 800,000 births in the UK last
year, an increase in the birth rate of 18% in a decade
and it seems that the ‘Bank of Mum and Dad’ is going
to have to work harder than ever in order to be able to
help out in the future.
It is generally accepted that starting early and
continuing for a long time is the best way to achieve a
successful outcome to an investment strategy and it is
nowmore important than ever that parents give their
children a financial head start in life. Awhole range of
savings and investment plans exist and since November
2011 when the Junior ISA replaced Child Trust Funds,
they have been able to support their loved ones in a
tax-efficient way. Parents can save tax-free for their
children up to the age of 18 through a Junior ISA up
to an allowance of £3720 this year, rising to £4,000 in
2014/15
JUNIOR ISA
Stocks and shares Junior ISAs work like a normal
stocks and shares ISAwhich can bemore risky than
the cash alternative and will usually attract annual
management and platform charges. Junior ISAs are a
long term investment vehicle and it is very important
that you select a provider that offers you the pricing
structure and investment choice appropriate to your
requirements. Make sure too that you have the ability
to access the account in a way that suits you in
order tomake investments or monitor performance.
Making the wrong choice at the outset can incur
punitive transfer charges if you decide to switch
horses later on. A Junior ISA can invest in a very large
range of equities, funds and investment trusts and it
is important that you do your homework in order to
achieve a balanced portfolio of investments that will
perform according to the chosen time-horizonwhich
may differ from your own investment portfolio.
Then do an ‘apples and apples’ comparison of a couple
of providers on
administration
fees, fund and
share dealing
costs, regular
investing charges
and any other
fees. As we adapt
to the post - RDR investment world, some providers
have no admin fees but still take a cut of commission
from fund annual management charges, others offer
‘clean’ funds that are free of this commission but charge
for buying and selling investments; most brokers have
now announced their new pricingmodels. If you plan
to regularly invest for your childmake sure the cost
of doing this is as low as possible, by either finding
a platform that offers discounted regular monthly
investment – some as low as £1.50 - or use one that
offers free fund dealing.
The predecessor to the Junior ISA, the Child Trust Fund
(CTF), gifted £250 at birth to all babies born on or after
1st September 2002with a similar lump sum at the
age of seven. Parents could top this up by up to £3,720
tax-free each year, and could continue to do sowhen
the Junior ISA replaced it in 2011. Nowithdrawals can
bemade from the account until the child reaches 18
andwhen the Junior ISA came along the government
withdrew its support for CTFs and no transfers were
allowed into Junior ISAs.
However, CTF holders were facedwith a dwindling
choice of investment options as fund providers lost
interest in the defunct product and in a volte face the
government will allow transfers into Junior ISA from a
currently provisional date of April 2015 stimulus.
THINGS TOCONSIDER
Money put in cannot be taken out until the child is 18 and
when they reach that age, the pot is theirs alone to do
what they will with it. Alternatives to a Junior ISA could
be to save into a standard child’s savings account, invest
using a standard DIY investing platform account or select a
children’s specific investment plan and an attractionmay
be that the account can be accessed before the child
reaches 18.
Investment companies, banks and building societies offer
children’s savings plans which use a child’s personal tax
allowance, currently £9,440, as an amount they can earn
a year before being taxed. If you are not using all of your
own annual ISA allowance you could set aside some of this
to invest for your children, with a pot earmarked for them
within your own DIY investing account.
Although it may not work for those that max out on their
allowance or have a large number of children, a couple with
two children could efficiently accommodate two additional
savings plans for their children within their existing stocks
and shares ISA.
TRANSFERRING FROMACTFTO
A JUNIOR ISA
The Treasury says transfers will operate in the same way as
moving from one ISA provider to another. Once you have
chosen a provider tomove to it will typically take up to 15
working days to transfer to a cash account and 30 days for
stocks and shares; you have to transfer the full amount from
your CTF before then closing it and the existing provider
cannot refuse.
WHAT INVESTMENTS SHOULD
YOUCONSIDER INA JUNIOR ISA?
Investing for children is a long-term game, so you can
afford to takemore risks than youmight do with your
ownmoney but you should still make sure that you
create a balanced portfolio to ensure that your risk is
spread across sectors and asset classes.
Unless you are a dedicated DIY investor then picking
individual shares may not be the best move; a fund or
investment trust will allow you to spread your risk and
require less work.
Try to select a complementary range of investments,
balancing growth investments – those in companies
where you expect to see a rise in their share price over
time andmainly deliver returns – with income
investments – companies that pay dividends which can
be reinvested to deliver solid returns from compounding
over time.
Charges are a key consideration - highmanagement
fees eat into returns and over 18 years this can deliver a
sizeable drag on howmuch an investment makes for your
child.
Passive tracker funds carry lowmanagement
charges – the HSBC FTSE 250 Tracker, for example,
which tracks themid-share index charges 0.25% and the
Vanguard FTSE UK Equity Index just 0.15% - whereas some
contend that the improved returns from a good active fund
manager more than justify the additional cost; choose
wisely though becausemany active funds may charge
handsomely yet still under perform passive index trackers.
Increasingly popular are investment trusts which offer
amanaged portfolio but with low fees. With somany
things to consider, it may just be too tempting to let the
ISA deadline slip and ‘start next year’ – but then spare a
thought for those facing student loans of £50,000 and
the fact that the average age of a first time buyer in
London has now topped 40 – and think what an even
modest regular savings and investment plan could do to
help your children in the future.
