23 November 2009

Thanks, Grandad!

NOTE: Since publishing this post, Child Trust Funds have been replaced by Junior ISAs.

If you are currently retired, then you are in what has been described as the “golden age” to be retired. Whether it feels like that or not, there are certainly some benefits available now which weren’t in the past, and others which won’t be in the future.

Health – therefore length of life – has improved greatly in recent years. To illustrate the point – in 1911 there were only 100 centenarians in the UK; but in 2008 there were 9,600. (I don’t think the Queen still sends out a telegram does she? Otherwise she would be very busy!) That results in a better quality of life in retirement now than in the past.

Secondly, the present generation of retirees have (on average) a better income than future generations are likely to have. And if it doesn’t feel like that to you, imagine what it will feel like to future retirees without much of a pension plan, and a state pension reducing in value!

What this all means is that some people in retirement are in the fortunate position of wanting to pass on their wealth to future generations. Often that means grandchildren heading for university, or looking forlornly at raising a large deposit on a house.

So what are possible ways of passing on money, tax-efficiently? Well, without going into the details, here are some ideas.

1. Child Trust Fund
Children born since 2002 are given a voucher for £250 to invest in a CTF with an extra payment of £250 made at age 7. This can be added to each year by other people (like grandparents) up to £1,200. CTFs are tax-free like ISAs, and the money is available to the child at 18, although admittedly this approach won’t go far towards a house.

2. ISAs
Always worth considering, but a child cannot have a cash ISA until age 16 (18 for a stocks and shares ISA). So the grandparent would have to consider their own ISA as being for the child.

(See my blog on Limited Offer by HM Government for more on tax-efficient saving.)

3. Trust Arrangements
Various types of investment in trust are possible, including “Bare” (where the child is entitled to the value of the investment at 18), or “Discretionary” (where some control may be retained). Tax treatment is dependant on the type of investment and needs careful consideration.

4. Children’s Bonus Bonds
National Savings & Investments provide this tax-free investment. It’s for a 5 year fixed term, and the current issue gives an interest rate of 2.5%. See NS&I Children's Bonus Bonds.

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