Josh’s grandfather passes away at age 83, leaving a pension fund of £200,000. Josh’s dad, Simon, is his only child, and is a higher rate taxpayer.
If Simon were the sole beneficiary and funds were designated to flexi-access drawdown in his name, any withdrawals he makes will be taxed at 40 per cent (or higher).
Josh is at private school and Simon is paying the fees out of his taxed income.
Fortunately, Josh’s grandfather included Josh in his nomination, which means some of his pension fund could go into a pension in Josh’s name.
Simon can manage the investments and make withdrawals at any time, as long as it is for Josh’s benefit.
This means Simon can make withdrawals from Josh’s beneficiary’s flexi-access drawdown fund to pay his school fees.
As Josh does not have any other income the whole of his personal allowance is available, so up to £12,500 can be withdrawn tax free each year (increasing in line with personal allowance).
When Josh reaches age 18, if there are funds left in his pension, then he will take over from Simon in managing his own investments and withdrawals.
Bare trust investment accounts
A child cannot legally own shares, so the easiest way to open an investment account for them is to have a bare trust account.
A bare trust document can be very simple, setting out the initial donor, trustees and who the beneficiary is.
Unlike the other type of accounts we have looked at, a bare trust does not have to be managed by the child’s parents.
They are therefore a popular option for grandparents setting up accounts for the benefit of their grandchildren that they can invest and manage.
Bare trusts also allow withdrawals at any age, as long as it is for the beneficiary’s benefit, so grandparents could invest and make withdrawals to pay school fees as appropriate.
On turning age 18 (or 16 in Scotland) the child-turned-adult has absolute entitlement to all the capital and income, but it is not an automatic handover to take over managing the assets.
The trustees can continue looking after the fund indefinitely, but what changes is the now-adult beneficiary can demand the capital and/or income at any time. If they are comfortable looking after their own affairs then the trust effectively ends and it becomes an adult investment account.
Although it is possible to set up a bare trust for two or more beneficiaries it is complex and rarely recommended due to the fact beneficiaries have absolute entitlement.
This can make things difficult when one reaches 18 and demands income, meanwhile their younger siblings cannot.
Both have entitlement to funds in the account and their split will keep changing, making for some complex calculations for the trustees. Far simpler for them to have an account each to avoid future family disputes.
