Tax-free investing - it's time to talk
With the first wave of Child Trust Funds maturing this year, there's a great opportunity to talk to your children about the benefits of saving and investing.
If one of your children has recently celebrated their 18th birthday then there's a good chance they'll have some money in a Child Trust Fund (CTF), which they can now access for the first time. It could be worth thousands of pounds depending on how much you've contributed over the years.
Although this might sound like a brilliant present, the responsibility that comes with receiving a large amount of money could be a bit daunting.
CTFs were set up by former Labour Chancellor Gordon Brown in September 2002, and every qualifying child was given a £250 voucher (or £500 if you were on a low income). The idea was to help make sure children arrived into adulthood with some savings and were encouraged to save, as well as understand why it's important. The scheme lasted until January 2011, when it was replaced by Junior ISAs.
If you have children aged nine or older then they will probably also have a CTF, which will mature when they turn 18. Rather than leave it to chance, these accounts provide the perfect opportunity to get them thinking about money and start learning about saving and investing. Here are five things you might like to talk about to get the conversation going.
1. Discuss their goals
Like any financial planning exercise, a good place to start is by talking to your teenager about what they'd like to do with the money. For example, they could use some of it to help pay their university fees. Alternatively, they may be more interested in putting the money towards more longer-term aspirations like a deposit for a house or flat. You might even decide to enjoy spending some of the money together now as a family.
2. Explore the options
When a CTF matures, you can either cash some or all of it in or transfer the money into an adult ISA. If you do not inform your provider what you would like to do, they will hold the money in a 'protected account' until you contact them. The funds will still be tax free, and any terms and conditions that applied to the CTF before it matured will still apply.
3. Start the investment journey
With so many different markets and products available today, investing can seem like a complex process. Yet there are some basic principles that stand the test of time, such as making sure you spread your risks and keeping a long-term perspective. Your children might also be interested to know that they can invest in ways that reflect their personal values about society and the environment.
4. Consider switching before maturity
The investment management charges on CTFs tend to be high compared with Junior ISAs. Meanwhile, with interest rates at record lows, cash CTF savers are being paid paltry returns. That's why it might make good financial sense to transfer any account before it matures. As well as potentially lower fund charges, ISAs also tend to offer more flexibility and choice when it comes to deciding how you'd like to invest.
5. Talk about inheritance
When you talk to your children about their CTFs, you could mention how you plan to pass on your own wealth. Decisions about inheritance are usually best taken together as a family, which will give everyone the chance to put across their point of view about what's important to them. Open and honest discussions with your children can help you all develop a sense of trust and common purpose.
If your children have CTFs and you'd like us to help you work out what to do then please get in touch. As well as exploring all the tax-efficient savings and investment options, we can get them thinking about their own financial futures as they enter into adult life.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.