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University challenge

With the imminent departure of first-year undergraduates, the costs mount up – house sharing, deposits, key money, the exorbitant cost of books (how much?), hall fees, allowances, season ticket renewal (how much?), the new home shirt (almost double the cost with “Wiltord” on the back and Premier League champions patches), the new away shirt, £40 seats in the away section at the Bridge, £32 in the away section at Upton Park (how much?). If only I&#39d saved.

Well, if the adviser can create this kind of financial anxiety in clients, he will have done a superb job and the ball will have been set rolling towards the goal of future financial well-being, at least as far as the children are concerned.

Last week, I looked at financial services products that can be effected by and for children. Obviously, in light of the lack of contractual capacity, those in the former category are extremely limited.

I mentioned, but did not look at in any detail, friendly society plans. These are extremely valuable tax-exempt vehicles which are, it seems, often overlooked when it comes to financial planning. There is a strong argument that, subject to the acceptability of the underlying investment (often with-profits) and charging structure, they should be considered as part of the foundation for tax-effective financial planning up to the tax-exempt limits. So how do they work and how are they applicable in planning for the financial future of children?

The Friendly Societies Act 1992 provides special rules for friendly societies to write certain types of savings plan in a tax-efficient way.

Under the relevant legislation, up to £25 a month or £270 a year can be paid into a friendly society savings plan on behalf of a child. You can have more than one plan with more than one friendly society as long as this overall limit is not exceeded. A plan may be taken out by an adult in his or her own name, in which case it may be made subject to a trust for a child. Alternatively, a plan can be taken out in the child&#39s name so that the child is the legal owner of the policy. In such a case, any premiums paid by the adult will be treated as gifts to the child.

Even though the child is the legal owner, the legislation provides for the parent or guardian (one only) to sign documents on the child&#39s behalf until he or she reaches 16. From 16, the act empowers the child to deal personally with the plan although the parent or guardian still retains the power to act until the child&#39s 18th birthday. So, during the period from 16 to 18, the society can accept instructions from either the child or the parent.

Where the policy is written on the life of a donor, in respect of a sum assured of up to £5,000, the act allows the donor to make a nomination as to who should benefit in the event of his or her death. This could include a minor child. No trust would be necessary or suitable in such circumstances and all you need to do is notify the society in writing.

However, unlike a trust, the nomination does not create any legal rights as such, for example, entitlement in favour of the nominated beneficiary. A nomination can be changed or revoked at any time and, in any event, the nomination is revoked on marriage. On death, the whole sum assured is included in the donor&#39s estate for inheritance tax purposes.

Where the sum assured is more than £5,000, a nomination can be made in respect of £5,000 and the excess over this sum will be paid to the donor&#39s estate subject to the usual rules on probate. The nomination is only in respect of the payment on death, for example, on survival to maturity, the benefits are paid to the legal owner, not the nominated beneficiary. If the nominated beneficiary dies before the plan owner, the nomination is extinguished.

As well as £25 a month per child, adults can also save £25 a month into a tax-free plan. This means that, say, for a family of mother, father and three children, a total of £125 a month or £1,500 a year can be saved in a tax-free environment in addition to the Isa allowances. Of course, leaving aside the cash Isa opportunities for 16 and 17-year-olds, only adults can invest in Isas.

So, in total, this family could be putting aside £15,500 a year into tax-free savings by contributing fully to Isas and friendly society plans. Put like this, there really are very few families who should be paying tax on their savings, once we get beyond taxable interest from deposit accounts. Even here, though, up to £3,000 of the permissible Isa investment allowance could go into a cash mini Isa providing non-taxable income. Of course, I am aware (as Sandler appears to be) that tax-effectiveness alone will not be enough to encourage savings among those who are not saving. However, it certainly should not discourage them.


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