Life looks pretty good for Jessica Whittaker and her partner, James. Jessica,
34, a voiceover artist, and James, 35, a documentary film-maker, have a
combined income of about £150,000. They live in an attractive three-bedroom
house in Putney, southwest London, and are proud parents of nine-month-old
Bella.
But baby Bella, as well as being their greatest joy, is also one of their
greatest financial headaches. Jessica, daughter of the veteran singer Roger
Whittaker, says: “We are desperate to sort out our family finances for her
future. We will obviously invest in her Child Trust Fund (CTF) but we have
no idea which choice would be best. We would also like to explore other ways
of investing for children but when I research the subject I feel I am
swimming with sharks.”
Fortunately, Bella will not be short of people keen to ensure that she has a
solid financial start in life. Her grandparents want to start putting small
sums into her CTF, and when Jessica and James are married next summer they
are thinking of suggesting that guests contribute money towards Bella’s
future education, rather than buy traditional wedding gifts of linen and
crockery.
Jessica says: “The problem is that we don’t know what is the best and most
tax-efficient way of doing this. Is it sensible for grandparents to put
money into the CTF, or is there a better way for them to invest their money?
And what about our friends? How best can they contribute?”
As Jessica sees it, one of the drawbacks to the CTF is that Bella will have
access to it at 18. “I remember what I was like at 18. If someone had given
me a lump sum of, say, £20,000 at that age, I would have spent it on such
‘essentials’ as clothes and holidays. We were thinking of perhaps investing
some money in the CTF but then starting some other investment for her, which
she could access only at the age of 25.”
While the couple are naturally anxious to safeguard Bella’s future, both James
and Jessica realise that they also need to spend some time looking after
their own. They currently have a total of £48,000 saved in a NatWest
instant-access account, but neither of them has any pension provision.
They calculate that, after all their outgoings, including the £1,500-a-month
repayment on their mortgage, they would probably have about £700 to invest
each month, either in a pension or some other form of investment. Jessica
says: “We are thinking about products such as Isas, but again we are
hampered by our inexperience. We would like to put some money into the stock
market, but we need guidance on how and where to invest. We are both
prepared to take on a reasonable degree of risk, with James slightly more
adventurous than me. We also want advice on whether it would be better to
build up a lump sum in an Isa or in a pension.”
One final concern is that the couple’s £337,000 mortgage is an interest-only
deal, which means that they are not paying off any of the loan amount.
Jessica says: “We realise that we have to tackle this as soon as we can, but
right now it is not at the top of our list of priorities. The current fixed
rate of 5.39 per cent has another four years to run, so we may hold fire
until that expires.”
Financial CV Earnings: joint annual income of £150,000.
Savings: £48,000 in a NatWest instant-access account.
Investment: Aiming to put away £700 a month jointly.
Mortgage: £337,000.
Objectives: To find the best way to invest for daughter’s future. Start
regular monthly investment, perhaps in the stock market, for their own
future and begin contributing to personal pensions.
Jessica and James: what the experts say
SAVINGS & INVESTMENT
Dennis Hall, Yellowtail Financial Planning
“Most people would jump at an offer of a guaranteed return of 8.98 per cent a
year on an investment over the next four years. This is precisely the rate
that Jessica and James could achieve if they decided to part-repay their
mortgage today.
“It works like this: their mortgage interest rate is 5.39 per cent, but as
payments are net after higher-rate tax, the real rate is 8.98 per cent on
every pound of mortgage. Savings would have to earn 8.98 per cent to be a
better bet than reducing the mortgage. Most fixed-rate mortgages allow
borrowers to repay a small amount of capital, up to about 10 per cent a year
without a penalty.
“As for savings, the couple could each save £3,000 a year into the cash
portion of an Isa to build up a decent cash buffer. Abbey’s Super Isa pays a
whopping 8.1 per cent gross until next May. They could use the remaining
£4,000 of their individual Isa allowance to start a portfolio of stock
market investments. James, as the more adventurous, could look at emerging
economies.
“Rather than individual funds, they could buy into one or more stock market
indices with exchange-traded funds. Several brokers, such as TD Waterhouse,
provide these with little or no annual account fee.”
Action plan
Prioritise mortgage repayment; it is likely to be your best investment.
Each save £3,000 in the cash element of an Isa.
Each save £4,000 in the stocks and shares element of an Isa.
PENSIONS
Danny Cox, Hargreaves Lansdown
“Jessica and James need to decide when they would like to retire and what sort
of income they will need. If they each saved £500 a month into a pension, in
today’s terms, at age 60 their pensions would be £9,300 and £8,800
respectively. The cost of pension saving is cheaper than other savings since
tax relief of up to 40 per cent is available, meaning that a £1,000
contribution could cost only £600 a month.
“They should start some pension savings now and increase this when funds
allow. They could start a pension for Bella, but in my view they should
delay doing so and concentrate on their own retirement planning for the
moment.”
Action Plan
Work out what income you require at retirement and then how much you need to
save.
Start saving now.
Do not worry about a pension for Bella for the time being.
PARENTS SAVING FOR A CHILD
Anna Bowes, AWD Chase de Vere
“I understand Jessica’s concern over the Child Trust Fund (CTF) money being
available to Bella at age 18. But the benefit of saving into the CTF is that
you can invest up to £1,200 a year tax-free. Outside the CTF, the income
produced by the investment from any parental gift must be less than £100 a
year per parent (so £200 if the money is gifted jointly) or it is taxed as
if it belongs to the parent. The couple could use Britannia Building
Society’s CTF, whichj pays 7.5 per cent. For additional savings, and to
provide their requested exposure to the stock market, they could look at the
Invesco Perpetual Income fund.
“There is also nothing to stop Jessica and James using their own Isa
allowances to save money for Bella. By doing this they would also keep total
control over the money saved.
“Income from investments gifted from grandparents and other family and friends
are not caught by the £100 rule.”
Action plan
Make contributions into Bella’s Child Trust Fund.
Put aside extra cash for Bella in your own Isas, thereby giving you control of
the money.
FAMILY AND FRIENDS SAVING FOR A CHILD
Ian Miles, Grant Thornton
“Bella’s grandparents could each make a gift up to the inheritance tax (IHT)
nil-rate band of £300,000 and put it into a trust for her. This would fall
outside the grandparents’ estates if they survive for seven years from the
date of the gifts. It also means that if Bella has an unused personal
allowance, she can reclaim the 40 per cent tax on the income paid to her or
her parents for her benefit. With this type of trust Bella does not have to
receive the capital at 18.
“Another option would be for grandparents to make gifts out of income with no
IHT to pay provided that the gifts are regular, out of genuine income and do
not reduce the donor’s standard of living. Friends can make tax-free gifts
to Bella of up to £250 under the small gifts exemption rule.”
Action Plan
Grandparents could set up a trust fund or make gifts out of income.
Friends could donate up to £250 under the small gifts exemption.
LINKS
Yellowtail Financial Planning: 020-7933 8670, www.yellowtail.co.uk;
Hargreaves Lansdown: 0117-900 9000, www.h-l.co.uk;
AWD Chase de Vere: 0845 7959112, www.awdplc.com;
Grant Thorton: 020-7383 5100, www.grant-thorton.co.uk
Jess and James’s response
“We understand the experts’ concern that we should start paying off our
mortgage, but we think we will defer that for the time being as we are
determined to start saving now. As Danny Cox’s projections show, we will
need to put away a large amount to achieve a decent pension in our old age.
“We liked Dennis Hall’s ideas on investment, especially the specific
recommendations, and will be opening some Isas and may buy some ETFs.
“The suggestions of Anna Bowes and Ian Miles on how we can build up a nest egg
for Bella were very interesting. We did not know about things like the small
gifts exemption rule or the concession for gifts made out of income.
“The whole exercise was very educational and has provided James and me with
plenty to think about.”
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