View more on these topics

State of the designation

This week, I will continue my look at investment strategies for the benefit of children.

Another disadvantage of nominee (or designated) accounts is that any income arising is always treated as the child&#39s income, which means that the parental settlement provisions apply to assess tax income on the parent if it exceeds £100 gross in a tax year, the child is under 18 and not married and the capital to fund the investment originated from the parent.

If active investment management is planned or a client wants to take advantage of tax planning opportunities, it will usually be best to execute an express trust.

A trust account means that the account/investment holder is not any particular individual but the trustees, for example, “XY and Z, etc, as trustees of the settlement…”

So, generally, which investments are available?

Isas

Under current legislation, Isas are only available to individuals aged 18 or over although cash Isas are available for 16 and 17-year-olds. Neither are they available to trustees of a trust. Of course, there is nothing to stop any particular individual taking out an Isa with a view to using the proceeds for a particular purpose, namely a child&#39s benefit.

Stakeholder pensions

It is possible for anybody to provide funds to be contributed to a stakeholder pension for a child. The obvious disadvantage of saving through this vehicle is that no funds will be available until the beneficiary is aged 50 and that benefits have to be taken in a particular form.

National Savings children&#39s bonus bonds

The bond is issued for a particular child and the child becomes absolutely entitled at the age of 16. No trusts are necessary.

Unit trusts, investment trusts and Oeics

In most cases, these investments would be made by those over the age of 18 on behalf of the child. It would be unusual for the investment house to knowingly accept an investment direct from a minor child as they could not get a valid discharge for payment of the cash value of the investments.

Moreover, all the inherent risks of contracting with a minor (particularly as the child would have the ability to repudiate the contract at 18) would be present.

The system of designated accounts is one way of dealing with this problem. Legally, such an arrangement would normally be construed as a bare trust.

A preferable alternative would be for the donor to create an express trust and for the trustees to invest for the benefit of the child.

Life insurance policies generally

Leaving aside the special position of friendly societies, some insurance companies may take a commercial risk and allow children old enough to understand the contract, say, from age 14 or 16, to propose for their ordinary savings plans.

Apart from the few offices having statutory authority to write business for children (including friendly societies), in all other cases, there is the risk of the child repudiating the contract before or at a reasonable time after reaching 18.

Another well used method of providing life insurance benefits for children is to write policies in trust. A simple form of statutory trust, (one written under the Married Women&#39s Property Act), is available to individuals effecting policies for the benefit of their own children.

Non-statutory trusts would normally be available in other circumstances or where greater flexibility is desired than provided under the Married Women&#39s Property Act.

Sometimes a special type of policy referred to as “child&#39s deferred insurance” can be effected. Such policies are normally written initially on the life of the parent and proposed by the parent, with the child becoming entitled to the cash sum at a future date.

Alternatively, the cash sum would be transferred as the first premium for a policy on the life of a child, say, on the child becoming 18.

Recommended

NDF offers remedy to loss

NDF Administration is aiming the NDF protected growth plan at investors who want to recoup losses made in the current environment of low equity returns.This guaranteed equity bond has a five-year term and offers investors 100 per cent of the growth in the FTSE 100 index. All of the original capital is returned to investors […]

SSAS fees were not guaranteed

John McCawley&#39s letter (Money Marketing, August 15) raises a few points and I respond to them in the same order. 1. The 90/10 or directors select portfolio is a fully approved SSAS and is not “fully insured”. Whereas the 90/10 is a packaged hybrid. It needs no conversion to take advantage of the full SSAS […]

Talkback

Is it safe to market hedge funds directly to the UK public? “No. There is a certain amount of risk involved in hedge funds so marketing them directly should not be allowed. They should be regulated.” John Stratton, Airevalley IFA“Yes. It is no more safe to market anything from polos to pensions. Provided they give […]

Correspondent&#39s week

My instructions were quite precise. We want you to do Correspondent&#39s Week but forget your week and concentrate on last week&#39s race. So, out the door went a week of City meetings in search of the capital for my new retiring IFAs&#39 venture and the finalisation of Impartial&#39s new brochure on mortgage advice and in […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com