Most parents and grandparents naturally want to see their children or grandchildren get the very best start they can in adult life, whether that’s to help with the costs of a higher education, getting the cash together towards a first home or starting their own family.
Like other areas of saving and investing, the earlier you start the better as money put aside has more time to grow like an acorn into an oak tree.
When it comes to investing for children, the first area of discussion normally turns to Junior ISAs and their predecessors, Child Trust Funds. These are types of tax-free investment accounts like adult an Individual Savings Account (ISA) but where the money cannot be accessed until the child is 18 years old.
This tax year, up to £4,128 – or £344 a month – can be squirreled away in a Junior ISA. Over 18 years, with some wind in the sails from stock market returns, diligent use of this allowance could build up a considerable pot of money.
Indeed, over 18 years full use of the Junior ISA allowance could enable parents or grandparents to tuck away at least £74,304 – though the real sum will be much higher as the allowance is nudged up each year in line with inflation.
However, even sticking with an annual contribution of £4,128 for 18 years, an impressive sum of £137,000 could be built up if an average annual compound growth rate of six per cent after costs were to be achieved. Of course, some parents might baulk at the idea of a teenager getting their hands on such largesse as they head off to freshers’ week at university and may prefer options that would delay the point when funds can be accessed to when their child is older and wiser.
One option that receives much less attention than Junior ISAs is the fact that you can also contribute into a pension for a child. While putting money aside into an investment that the child will not be able to access until they have grown up, perhaps had a family of their own and are about to retire, may seem intuitively odd, investing in a pension for a child could be one of the most powerful financial gifts a parent or grandparent can make.
Despite the fact that most children are unlikely to have any taxable earnings, many people may not be aware that amounts of up to £2,880 a year can be invested into a pension for a child and these will still be topped up by HM Revenue & Customs in respect of basic-rate tax.
Therefore, a contribution of £2,880 is increased by £720 to £3,600 in total, providing an additional upfront boost compared to a Junior ISA. This is an often-overlooked allowance that has been frozen at £3,600 for many years.
A parent doing this for 18 years could invest a grand sum of £51,840 that would then be topped up by the taxman to the tune of £12,960 over this timescale so that total contributions would be worth £64,800.
If you assume the same average compound growth rate of six per cent (net of costs) from markets over this time, after 18 years the pension could be worth an impressive £120,017. Even if no further contributions were made but the pension continued to average an annualised compound return of six per cent, by the time the child reaches 60 years of age the value would be worth an eye-popping £1.48 million.
That’s right – for a £52,000 outlay spread over 18 years, a parent or grandparent could help their child become an eventual pension millionaire and that is before they, or their future employers, put any money aside.
That would make a gift of long-term future financial security to a child that most of us would be envious of today – especially when combined alongside the more obvious route of a Junior ISA.
Jason Hollands is managing director of Tilney Group.
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