Saving for Children
As we highlight separately in our article about Wood Street Mission, the cost of returning to school or university can be an issue for some students and their families.
As most people will be aware from articles in the media, university courses in England have tuition fees of up to £9,250 per annum with courses typically lasting a minimum of three years. In addition, most students borrow an additional amount to assist with their living expenses, which often includes accommodation costs. This can result in students starting off their working life with a considerable amount of debt. Interest on the amount borrowed is charged whilst they are a student, and this is at a rate of 5.4% (RPI +3%) currently. A student begins to repay the loan when their earnings exceed a threshold which this year is £25,725. However, interest is still charged, once again currently at a rate of 5.4%.
An amount of 9% of earnings above the threshold level is deducted automatically from pay until the loan is repaid or a period of 30 years has elapsed at which point any remaining loan is written off. For those who do not earn above the threshold, interest continues to roll up at a reduced level of RPI currently 2.4% and for those earning £25,725-£46,305 RPI + up to 3% and for those earning over £46,305 RPI + 3%, but no repayment is required unless or until their earnings exceed the threshold. At the end of 30 years any remaining loan is written off.
We are often approached by parents and grandparents who are looking to put some money aside to wholly or partly reduce the potentially huge liabilities.
Whilst individual advice is recommended, one popular option is that of a Junior Individual Savings Account (JISA). These are long-term tax-free savings accounts for children and the savings limit for a Junior ISA in the 2019/2020 tax year is £4,368. As with most tax-free savings vehicles, there are restrictions and conditions to be aware of, but generally the child must be both under 18 and living in the UK. A parent or legal guardian must open the Junior ISA on behalf of a child, but after that anyone such as a grandparent can top this up – until the annual savings limit is reached. One important point to bear in mind is that the Junior ISA would convert to an adult ISA at the age of 18 and the funds then belong to the child, and they would be free to use the money as they wish. So, even if they chose not to go to University, the value of the JISA could be used, for example, towards a deposit on a house or a vehicle to allow them to get to their place of work.
The two main investment options with junior ISAs are to hold funds in cash or stocks and shares. Cash has the advantage of security, but there is a need to accept there is limited scope for growth in the current low interest rate economy. It is possible, however to select term deposits, or structured deposits, which offer the same security as cash whilst trying to obtain a slightly better return. Stocks and shares ISA’s offer a wide and varied range of funds to meet all levels of risk. These offer the potential for higher returns, but also require the investor to accept that the returns can be volatile, dependent upon the underlying investments. It is important to take into account the investment term, purpose and attitude to risk when deciding upon the most appropriate investment strategy.
There are other ways of grandparents saving tax efficiently for grandchildren and if this is something that you are interested in, please do not hesitate to contact your usual Chancellor advisor.