Insurance and Investments for Children Following Separation

After separation you’ll find that there are a number of financial issues that need to be addressed. One is putting together a new financial future for yourself. Another is setting up finances to benefit your children, to help pay for university or other things – maybe even a deposit on a house. However, you can’t really begin on the second until your own finances have found an even keel.

Insurance

One thing you can do (and it might even be mandated in a separation or divorce agreement) is to set up an insurance policy with your children named as beneficiaries, so they’ll receive money if you die. That might seem morbid, but it’s just good sense. It means that, apart from what you leave them in your will, your children will receive some money, although that’s hardly compensation for not having a father around. However, it’s one very tangible legacy you can leave them.

How large a policy you take out depends a great deal on what you can afford, and that’s affected by your age and medical condition, along with other factors, such as whether you smoke or not. Take out the biggest policy you can comfortably afford. That might be small at first, but you can take out another or increase it later as your finances improve. At the same time, shop around for the best deals – there are plenty out there.

Investments

Investing money to help your children pay for university, or to give them a down payment on a house, is one of the best and biggest things you can do for them financially. However, until you have the money to invest, you can’t really begin. Once you reach that stage, what are your best strategies? The main ones are an instant access savings account, which is secure, but pays a low rate of interest, ISAs or unit trusts, National Savings, investment bonds and cash deposit accounts, which offer higher interest, but under many of which you can’t access the money for five years, friendly society bonds, which do bring a higher rate of return, or the stock market, where your return will possibly but much higher – but so will the risk. You might also consider equity income funds, fixed interest funds, or commercial property funds, done through an equity manager, although these still carry risks.

If you’re over 50 and want to pay for university for your children, another possible option is your pension, either by withdrawing cash or phasing your pension benefits. Check first; these might not be possible on your particular pension, or there might be strict conditions attached.

Taxes

Obviously, when you invest for your children, you want the taxman to take the smallest possible bite out of your money. If the income is less than £100 p.a., it’s classed as the child’s income. More than that, and it’s classed as your income.

What you might consider with your investments, whatever they are, is setting up what’s called a bare trust. Under this you hold investments on behalf of someone else (your children, in this case). For tax purposes, in most cases bare trusts are considered in the name of the beneficiary (i.e., your child). Additionally, they may become exempt from Inheritance Tax. Legally, although just designating an account as being on behalf of your children, the best course is to make a formal declaration of a trust to the tax people, which is generally accomplished through a solicitor.

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