With Christmas coming up, thoughts turn to giving presents to children, grandchildren and other young relations. If there is a reasonable chunk of money available, sometimes it is best to avoid Toys R Us and give an investment instead. So how should an adviser go about recommending a suitable option?
A lot depends on the age of the child, the amount of money in question, what the person making the gift is trying to achieve and the family’s personal circumstances generally. For simplicity and space reasons, I have ignored the possibility of using trusts and underlying bond investments. The comparison I will focus on is between a Junior Isa and a pension contribution.
Let’s assume the the child in question is under five, the family are UK resident and domiciled, and the amount is between £1,000 and £5,000. If we are thinking about tens or hundreds of thousands, the issues become rather more complicated.
It is also important to know whether the money is to be invested for the long term or whether it might be needed in the next few years to pay for school fees or such like. The gifts we are considering here are strictly for the reasonably distant future, for when the child is more or less an adult.
Top of the list – and specifically designed for the job – is the Jisa. You can invest a total of up to £4,080 into something that looks remarkably like a normal Isa, with a wide range of investment funds, reasonably transparent charges and freedom from tax on the fund, as well as when the owner draws any money out.
The Jisa can eventually be converted into a mainstream Isa and become part of the owner’s core savings strategy when they reach the age of 18.
With a pretty long timescale between the gift and the earliest date of accessing it, you would be hard put to make the case for a cash fund, especially at current rates of interest.
The case for equities is strong. Over a timescale of at least 13 years, with reinvested dividends, the chances of a better return than would come from cash are high. The interim ups and downs of the market would not matter much because of the relatively long period before the funds can be accessed. The child would be introduced to the realities of the investment world from an early age and would learn all manner of lessons about economics, science and technology, politics, society and the environment. Above all, they will learn the nature of risk.
And then there is a selfish reason for the adviser. If the parents or grandparents wish for a cash fund prevails, the resulting paltry investment outcome will not reflect well on your advice – however unfair that may seem. If your aim is to build strong long-term business relations with the next generation of the client’s family, you will have established some rocky foundations.
With a decent investment wind behind the Jisa and perhaps a few more years’ contributions, it should be possible to accumulate a tidy sum for the child at age 18 or later. The lucky beneficiary would be in a good position to fund education costs, make a down payment on a home, invest in a business or build up a solid foundation of long-term savings.
Or they could blow the lot on a fast car, motorbike or an exceptionally good party.
Which is where advisers should warn parents that Jisas do involve a degree of moral hazard. And this leads many to suggest solutions that do not give the young person access to tempting sums of money at an impressionable age.
The child would be introduced to the realities of the investment world from an early age and would learn all manner of lessons about economics, science and technology, politics, society and the environment.
At the other end of the scale in terms of access is an investment in a pension contribution for the child. Advisers are aware of this possibility but very few clients seem to know about it.
The client can invest up to £2,880 in a personal pension for the child and, in effect, HM Revenue & Customs will add a further quarter of this amount (£720) in the form of 20 per cent basic rate tax relief. The fund is then taxed in the same way as the Isa (i.e. no UK tax on income and gains) and the resulting fund is three-quarters taxable and a quarter tax free, unless there is a change in the rules.
But this option will mean a long wait for the child. Indeed, they almost certainly will not have access until they are in their 60s or perhaps even later. So their interest and excitement about the fund and the lessons it could provide will be that much more remote. It might lay the foundations for their retirement, and could well get them thinking about it, but there is a possibility it might even make them a little complacent about saving further for it. You pay your money and you take your chance.
Danby Bloch is chairman at Helm Godfrey