It’s tempting to think that your children can plan their own financial futures, especially if you are still struggling with your financial present.
However, one of the big responsibilities of being a parent is preparing your children for life, and one of the key life skills is managing money. Giving your children a good grounding in money matters is vital. But you could support the financial theory by putting it into practice. With some investment, you could give your children a sound financial foundation.
But you might be able to go further and use that foundation to put them on the road to become millionaires.
The simple fact is that time really is money. The more time money has to grow, the less needs to be saved to build up a larger lump sum. Setting them on the path to becoming millionaires is possible if you start when they are young enough.
So, if you can spare a little to give your children a financial foundation, what is the best way to do it?
Look at a child’s pension
A child’s pension may seem a strange idea, but like your own pension, it means some major tax advantages and its real strength comes from starting early and giving contributions longer to grow.
You can open a pension for each of your children, and the government automatically refunds tax on savings of up to £2,880 per year, per child.
When your child turns 18 they become the owner of the pension. They can’t cash it in until they are 57 under current legislation, but they can continue to contribute or leave the savings invested.
So based on current HMRC tax legislation if you pay £240 each month into a junior personal pension for 18 years, the £2,880 a year is boosted by 20% tax relief from the government giving an extra £720 over a year.
Even before you look at compound growth it means £64,800 in their pension pots by the time they are 18.
Think about a Junior ISA
Having a savings account is a great way to build up a reserve of cash – and provide a simple answer to relatives questions about what present to give at birthdays and Christmas,
However, the taxman might take a share as soon as interest starts to head past £1000 per year.
A Junior ISA – or JISA – gives adults a tax-efficient way to save money on behalf of a child.
You can currently put up to £9,000 a year into a JISA, and as with any other ISAs, the income and capital gains earned are free of tax.
Rather than savings, which still mean sadly small returns even in an ISA, your child can have investments, which can have the potential for higher growth and returns, however investment returns are not guaranteed and equity investments do not afford the same capital security as deposit accounts.
Only a child’s parent or legal guardian can open the JISA on their behalf. When the child turns 16, they will be able to take control of it – and even put in money up to the level of a standard ISA allowance as well as the JISA allowance – but won’t be able to withdraw money until they turn 18. They then get full control of the account, which becomes an adult ISA.
18 years of maximum payment into a JISA adds up to £ 162,000, again ignoring any growth earned by the investment.
What should you do?
You can set up a JISA or a child’s pension, or both. But getting the best value for your money needs expert knowledge of the market – and negotiating the taxation regulations to ensure that your generosity does not come back to bite you – needs professional help.
For the professional help you need to make your children millionaires, call the Continuum team today.
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 strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
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.
Tax rates and reliefs are current for tax year 2023/24 and may be subject to future change.
The Financial Conduct Authority does not regulate deposit accounts and taxation advice.