Having to struggle with finances can take much of the joy out of life. The feeling that you can’t afford the things you want, the home you would like to live in or the kind of retirement you hope for are painful realities for many of us.
But it doesn’t have to be that way for your children. It is actually possible to give them a foundation of real wealth, and very possibly make them a millionaire.
At Continuum we are looking at how.
Step 1. Start early
Starting to build a financial nest egg for your child can be more manageable the earlier you begin. Beginning a savings journey when they’re very young, even from birth, may offer three meaningful advantages
First, getting into the habit of putting money away for your child could help ensure you don’t miss the cash yourself.
Secondly, it gives you the advantage of time. With more time, your savings could benefit from the power of compounding—where not only your initial investment earns interest, but that interest itself begins to generate returns
And thirdly, when they’re old enough to understand, it can demonstrate just how rewarding it is to develop a savings habit
Step 2. Give them a pension
As a parent, you can set up a pension for your child and contribute up to £2,880 a year (for the current tax year). Why do it? Because it has similar tax relief benefits as an adult pension.
.Once set up, other relatives, such as grandparents, great-grandparents and even friends can pay money in, provided the combined annual contributions do not exceed £2,880 net (£3,600 gross) per child per year.
This is currently topped up by up to £720 by the Government with tax relief, even though the child will not be paying tax.
If you were to make regular payments of £2,880 a year from the time your child is born until they turn 18, you’d contribute a total of £51,840. With 5% annual compound growth, that could potentially grow to around £100,000 by age 18. And if that amount stays invested at the same rate until your child reaches retirement age –possibly at age 67– it could potentially grow to around £1million
Step 3. Invest for your child
Pensions have one major drawback. You need to reach retirement age to get at the money. The earliest retirement age is currently 55, but is set to rise to 57 from 2028, and likely to go higher still in the future.
If your son or daughter are to enjoy the wealth you’re creating for them, they need to have access to funds for that first-class education, first car, and first home.
Investing on the financial markets could provide the accessible wealth they would need. Of course, you are investing to make your child wealthy, not the taxman, so it makes sense to do this with a Junior ISA, or JISA.
The maximum you can contribute into a stocks and shares JISA is £9,000 a year until your child turns 18. Make one payment at birth and £9000 (at an average of 5% annual compound growth) more than doubles to Over £20,000
If you contribute £9,000 every year (at the same average growth) until they are 18 it could become over £250,000, enough to get your child off to a very solid start in life.
Step 4. See what you can really do
Maximising your payments into a pension and JISA are certainly rewarding, but for most of us, giving that kind of cash is simply not going to be possible.
But you may be able to scale back and still give your children a better start in life.
Look at your resources and what you can spare and remember that you may be able to call on help from grandparents and other relatives to get together the funds you need.
Step 5. Get some expert help
Setting up a child’s pension and finding a suitable Junior Stocks and Shares ISA can be easier if you have an expert working with you.
At Continuum we can help find the most suitable providers for you and your family, and help you look at your own financial position to help you see how much you can really afford to give.
If you have a little future millionaire in your care, it’s time to call us today.
https://allcalculators.co.uk/future-value-calculator
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment, retirement or taxation strategy, you should seek independent financial advice before embarking on any course of action.
Investors in ISAs do not pay any personal tax on income or gains. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances
The Financial Conduct Authority does not regulate taxation advice.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk
Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances. We recommend that the investor seeks professional advice on personal taxation matters
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
