Savvy saving strategies for advisers to help clients make their children’s life goals achievable
It is no secret that costs for
the next generation look set to be higher than they have been for previous ones in many ways.
Annual university tuition fees, for example, are currently capped at a staggering £9,000. However, rule changes introduced last year mean universities will have the power to raise fees annually going forwards. Less than 10 years ago, they were just £3,000.
House deposits for first-time buyers are also increasing at an eye- watering rate. Recent figures from Nationwide suggest the average deposit for the UK is now around £20,000, which takes the typical first-time buyer around eight years to save.
To make this picture even starker, for those living down south, it says a typical 20 per cent deposit is now more than £80,000.
But on to a more positive note as thoughts turn toward the tax year end: there are some easy tax quirks that both parents and children can take advantage of to maximise savings for the ever growing tally of expenses ahead of them.
Maximise allowances for CTFs and Jisas
The first opportunity relates to child trust funds. These were tax-free savings accounts that were open to children born between 1 September 2002 and 2 January 2011. They were effectively replaced by Junior Isas, which some perceive as being more flexible.
While it is no longer possible to open a new CTF, there are still millions in existence and many parents have taken advantage of the 2015 rule change that allows them to be transferred into Jisas.
But clients in this position may want to consider funding the CTF before pulling the trigger and transferring in order to take full advantage of the allowances on offer.
CTFs have their own annual tax-free payment allowance of £4,128, which is separate to the Jisa allowance (also £4,128). Importantly, the CTF allowance period is aligned with the child’s birthday rather than the tax year. In practice, this means you could pay £4,128 into a CTF before a child’s birthday and another £4,128 after their birthday. You could then transfer the CTF to a Jisa and pay in the full Jisa allowance of £4,128, meaning you are essentially “triple-funding” a child’s account in a very short space of time.
Given the CTFs and Jisas are separate tax wrappers, there is no issue with having paid into both within a tax year. A word of caution, though. A child is not eligible for a Jisa while they still hold a CTF so, to fully maximise the funding potential, the CTF must be fully transferred into the Jisa.
Jisa-Isa transition period
This year is also the year that the first CTF children turn 16 – the minimum age for adult cash Isas – and there are some handy tax wrapper quirks here for those in that transitional 16-18 age bracket.
These revolve primarily around the fact the Jisa limits are separate to the adult Isa limits, meaning a child can take advantage of both allowances during the same tax year.
For instance, in the tax year a child turns 16, they could subscribe the full Jisa allowance of £4,128 as normal. From their 16th birthday, they could also subscribe the full adult Isa allowance of £20,000 to an adult cash Isa. This means total tax-free subscriptions of £24,128 in a single tax year.
And in the tax year a child turns 18, they could subscribe the full Jisa allowance (as long as they did it before they turned 18), then from their 18th birthday could also subscribe the full adult Isa allowance to an adult stocks and shares Isa or Innovative Finance Isa. Or they could use £4,000 of their overall Isa allowance to make a payment into a Lifetime Isa.
Used over three years, a child could potentially invest more than £72,000, which is substantially more than an adult could have done over the same period.
Admittedly, this could leave a child with three separate Isas – Jisa, adult cash Isa, adult stocks and shares Isa – but these could all be amalgamated after the child’s 18th birthday. In the meantime, any growth rolls up in a completely tax-free environment.
Funding life’s first tick boxes – education, buying a first car, house, a wedding and so on – has always been a mammoth task faced by both parents and children, but in today’s world it feels like it borders on the impossible. Armed with savvy saving strategies advisers can really help to make such life goals achievable for their clients.
Martin Jones is technical resources consultant at AJ Bell