The Christmas lights have been switched on, Father Christmas has arrived at the grotto, and most chi...
The Christmas lights have been switched on, Father Christmas has arrived at the grotto, and most children have begun their seasonal campaign for this year's toy, possibly Play Station 2. However, in addition to those essential toys, you may well want to think about including an investment trust saving scheme in your clients' stockings for their children this year.
Investment trusts are an ideal vehicle when it comes to building a nest egg for your clients' children or funding school or university costs. Investment trusts have excellent long-term returns, low management charges and enable the investor to spread their risk. If you had invested £1,000 on behalf of a child at birth in the average investment trust, on their 18th birthday you could give them a cheque for £16,897. If you waited till they were 21 you could give them a cheque for £34,439, an impressive start in life.
Why have investment trusts performed well? The unique structure of investment trusts has led to their good long-term performance and suitability for children. Investment trusts enjoy a simple and single purpose: only to make money for their investors. Your clients' children will have all the benefits of stock market investment whilst spreading the risk in fifty or more different companies. In addition, all investment trust companies have boards of directors, independent of the managers, whose responsibility is to work on behalf of shareholders, with the sole purpose of maximising value.
One of the ways boards can have a favourable influence is over charges. Earlier this year Fitzrovia International compared the total expense ratios (TER) of investment trusts and retail unit trusts and Oeics. As the size of the investment trusts increased, the TER dramatically decreased. Investment trusts with assets of more than £1bn had an average TER of only 0.46%, whereas unit trusts and Oeics with assets of more than £1bn have an average TER of 1.32%. It is clear that lower charges means more money remains invested and this can have an important impact on children's investments which are invested for the long-term.
Investing for children
Children under the age of 18 are not able to hold company shares in their own name. An easy way around this is for the client to invest on their behalf in a way that they become the beneficial owners of the shares. Even though the shares will be registered in the client's name you can include the children's initials alongside. This involves setting up a designated account and is a very simple way of holding shares in trust, called a bare trust.
Although your client will be the registered owner of the shares, the child is the beneficial owner, and your clients are obliged to hand over the assets, when the child reaches 18. Until that time, your client is the trustee and is responsible for looking after the investment on their behalf, until the shares can be registered in the child's name. All of the necessary paperwork for starting up this type of trust is usually available from your investment trust provider.
Children have their own personal tax allowance, and as long as the child's taxable income does not exceed the allowance (for the year 2000-2001: £4,385), there will be no income tax at all to pay on the income received. However, the income will be added to any other source of income received by the child, such as wages from a part-time job. Children also have a capital gains tax allowance if profits are made on the disposal of the shares.
One of the most important questions is whether your client will have to pay tax on the child's income. This really depends on who is gifting the investment to the child and what their relationship is. If your clients are parents who have made an investment on the behalf of their child, which generates an income of £100 or more a year, it is deemed to be part of your income and you will have to pay income tax on that income. However, if your client is a grandparent, friend or other relation the income tax situation is different. Any income generated by gifts made from those other than parents is treated as the child's.
Two financial problems for your clients are school fees and university expenses.
On average, day schools can charge up to £7,300 a year and boarding schools can charge up to £15,000 a year to educate a child between the ages of 13 to 18 (Independent Schools Information Service).
In addition, the introduction of tuition fees at universities has increased the burden. During the 1999/2000 academic year a student outside London on average spent £5,881 on tuition, rent, fuel, food, laundry, insurance, clothing, travel, books and leisure.
For a student inside London this figure spiraled to £7,192 (National Union of Students). To meet these expenses most students would have taken out hefty loans of up to £3,635 for students living outside London and up to £4,480 for students living in London. However there is still a substantial shortfall between the loans and expenses.
A popular way of saving for children, whether for school fees or university expenses is through an investment trust saving scheme. From as little as £25 per month or £250 lump sum your clients can save via an investment trust saving scheme which is a flexible and easy way to save as there are no penalties for stopping or reducing contributions.
If your clients save regularly they can take advantage of the benefits of pound cost averaging, allowing them to buy more shares when prices are low and fewer shares when prices are high. If you had invested £40 per month into the average global investment trust over the last 15 years, it would now be worth £20,905. The same amount invested in a building society over the last 15 years would be worth only £10,207.
Another useful way for providing cover for clients' school or university expenses is zero dividend preference shares. Despite their l
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