At this time of year finding the right gifts for all of your friends and family can be a challenge. Keeping up with the latest "must haves" for children can be tricky. So, instead of spending a fortune on the latest gadget or toy which may be outdated within months, why not consider a more lasting gift by making an investment which may grow over time.
There are lots of ways in which you can invest for all ages. Some include tax breaks, so that income and capital growth are tax free. Some offer a boost to the savings by adding tax relief to your gift.
Junior ISAs Age 0-18
Junior ISAs (JISA) which allows up to £4,128 to be paid into an account this tax year. There is no income tax or capital gains tax to pay on the income and growth. Anyone can pay this in for the child until they are 18. From age 18 the child can access their savings or leave them invested, if the latter, they remain tax free.
Savings can be made in instalments or as a one off sum but can only be to one JISA provider per tax year for each of the cash, stocks and shares element. So if paying into a JISA for someone else's child, you will need to ask the parent or guardian whether they have established one for the current tax year.
16 and 17 year olds can have both a JISA and an adult cash ISA giving them £24,128 of tax free savings allowances for these 2 years. They can also opt to place part of their allowance up to £3,600 per year in a help to buy ISA, whereas the new Lifetime ISA is only available from age 18.
ISAs 18 and over
From the age of 18 the ISA allowance increases to £20,000 per tax year. Third party payments can be made but only one of each type of ISA (cash or stocks and shares) may be subscribed to in each tax year.
Lifetime ISAs age 18-40
Those aged 18 to 40 and are saving for their first home may invest in the Lifetime ISA (LISA). Up to £4,000 of the annual £20,000 ISA allowance may be invested this way.
The LISA can be funded via small regular savings or lump sums. It also enjoys a 25% uplift from the HMRC. So, £4,000 saved becomes worth £5,000 automatically. Any growth on top is also tax free.
The LISA may be cashed in at any time and will be tax free, so long as it is used to purchase a first home up to £450,000 in value. If it is not used for this purpose it can still be cashed in tax free, but not till after age 60.
If it is cashed sooner or for any other reason (except on death or terminal illness where life expectancy is less than 12 months) it will be subject to a 25% penalty on the whole amount withdrawn.
Pensions Age 0-75
Anyone under 75 may also have pension contributions paid on their behalf. If they have no earned income, up to £3,600 per tax year can be paid to a personal or stakeholder pension. Like the ISAs this rolls up in a tax free fund.
Pension contributions offer an immediate uplift in the form of basic rate tax relief given by HMRC on the savings made. Many plans can be started with as little as £20 per month which means that the cost of the gift will be £16 per month, the balance is added as tax relief. The child does not have to be a taxpayer to qualify for this. Some SIPP providers do not fund tax relief up front, so this has to be claimed separately from HMRC.
Pension funds however cannot be accessed before age 58 and this age may increase in line with future increases in the State pension age. After that age the pension plan owner can withdraw up to 25% of the fund tax free. The balance of the fund can be withdrawn as regular income, in stages or as one lump but will be subject to income tax on the withdrawn amounts at whatever rate the pension plan owner is subject to at that time.
Both cash based investments and equity and fixed interest funds are permissible for all of these savings vehicles. When choosing an investment, thought needs to be given to the timeframe over which the funds are to be invested. Investing in equities and fixed interest where the money is planned to be withdrawn in the short term is risky. Equally, investing in cash for longer term goals is likely to result in investment returns below inflation while interest rates remain lower than annual price increases. See our article discussing the different ISA's here.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.Back to News & Views