Copyright © 2008 by "Ian McKeever & Co"  ·  All Rights reserved  ·  E-Mail: ianmckeever@actuaries.eu.com
Valuing Your Future
Ian McKeever & Co Consulting Actuaries
Market Views
Markets
Why should the government have to rescue banks?
The banking Crisis
Economic Views
The Economic Outlook
Professional
Services
Issued by Ian McKeever & Co. Authorised and regulated by the Financial Services Authority in the conduct of investment business 
What Government Borrowing means for you
What it means
The Basics :   Children 2 The Nestegg
As long as one of the purposes of the nestegg is not to pay school fees, the objective is to provide the child with a lump sum at some point in their life. This may be 18, if it is to fund for further education or 25 if it is to provide a step onto the housing ladder.

In either event parents may wish that access is restricted or at least difficult before that time and that the money is not frittered away on small items of frivolous expenditure

In most circumstances an ideal investment is

1) Risk free
2) Easily realisable, and
3) Easily divisible so that a part of the money can be used to meet the minor emergencies of life.

If an investor can compromise on any of these objectives enhanced returns are achievable. In the case of a nestegg it is possible and even desirable to compromise on the last two of them. Depending on the age of the child it may be possible to compromise on risk as well, depending on the time horizon, which in turn depends on the age of the child.

Achieving the objectives
1. A trust is in many ways the ideal solution, as the child has no direct access to the money until a specified time. In the interim the trustees have virtually complete freedom to invest the money as they see fit and may release money early if the circumstances justify it. On the other hand a trust is expensive to set up, the trustees will have to devote time to running the trust which will cost the family time and or money. Gifts to trusts in excess of the tax free “nil Rate Band0 (Currently £312,0000) will generally incur a 20% Inheritance Tax charge and the trust itself may be subject to periodic Inheritance Tax charges. Husband and wife can, however, transfer up to £624,00 between them to a trust, Inheritance Tax free. A trust adds to the complexity and so a relatively large nestegg is needed to justify it.
2. Child Trust Funds are an initiative by the government to provide a nestegg for children, however it is only available to children born after 1st September 2002. The government will have provided a voucher worth £250 to start the plan and a further £250 on the child's seventh birthday (these figures are doubled for low-income families). Parents or anyone can add up to £1,200 per annum and the funds are tax-free. The child will have full access to the money from age 18.
3. Friendly Society Children’s policies are a more limited alternative but available to all children. The person making the gift must commit to making regular contributions of a fixed amount (between £5 and £25 a month) for the duration of the policy, which is for a period of between ten and twenty five years. The fund is tax-free but the child can surrender the policy from age 16. However there may be tax and other penalties on early encashment, which act as a discouragement from doing so.
4. Insurance company endowment policies may be written in trust for children but there may be Inheritance tax implications for which provision must be made. In some communities it was common to use such policies on the parents life to make advance funding for major family occasions such as weddings.
5. Personal pension contributions can be made in respect of children of up to £3,600 per annum gross. There is in effect tax relief on contributions at the basic rate and the fund is tax-free. The money cannot be accessed until age 55 and then only a quarter of it can be taken in cash. The money is then subject to the pensions tax regime which may change in the future. Although limiting access to the money is frequently a positive objective where children are involved, quite such a long lock in period might be seen as going too far.
6. Second-Hand Life Policies and Trust Reversions offer another alternative investment. With second hand policies the maturity date is defined but with reversions it is whenever the life tenant dies. Both offer potentially good returns and a degree of lock in to the investment, which may be attractive for an investment for children. See separate page on this.
7. Vintage Port and fine wines may seem somewhat offbeat but as investments they have some attractions. Vintage port in particular has advantages. Very few years are declared vintages. In the early years, it is virtually undrinkable but the wine improves with age and all things being equal will increase in value for that reason. Selling and storage will however involve some costs and there is always the risk of the child drinking the investment. The youngest vintage considered ready for drinking is 1983 and so the time frame is good. Generally the better the wine the longer it takes to mature. One site rates the best vintage to be 1927, which gives an idea of the life of these wines. The best of recent years is 1994 but 2003 is a close second. See a good wine merchant about buying and storage.
School Fees
School fees are a big long term commitment stretching over 15 to 20 years. At various times paying them will involve saving in advance followed eventually by borrowing. If Grandparents can help it make things easier.

It worth bearing in mind that public schools tend to be registered charities and can therefore invest money in a more tax efficient way than parents. However, this could well involve making a commitment to a particular school which may prove undesirable.

How the cost of school fees is met will depend very much on the circumstances of the particular family. Every family undertaking such a commitment needs advice tailored to their particular circumstances.