Investing for children is one of the best presents you can give to the young people in your life.
You may have read last month’s article about the miracle that is compounding and how this works to maximise returns on long-term investments. Time is key to growing wealth through compound growth, so start investing for children early enough and you could give them the gift of a lifetime.
Giving the children you love a healthy financial start to adulthood could help them: fund further education; get a firm step onto the property ladder; or explore the world, without worrying about the cost of enjoying half-decent accommodation on the way.
Apart from the invaluable financial freedom they might enjoy, investing for children is also a fantastic way to help them learn important money lessons. As they get older, you can involve them in conversations and decisions about how and where their money is invested.
We did the sums, so you don’t have to
Our research, published in FT Adviser, revealed that if an 18-year-old today puts £1.71 a day into their pension until age 68, they could have saved £1 million.
While this calculation is based on a growth rate of 10%, even if the world is in a lower growth phase, because of the miracles of compounding over time this still means that you don’t need to save hundreds of pounds a week to be a millionaire at 68.
While £1 million might feel like a stretch, the idea of putting just £1.71 into a pension each day can seem far more achievable. This £1 million milestone assumes a growth rate of 10%.
Imagine what you could do if you started saving for your children or grandchildren from the day they were born.
Capitalise on time with compound growth
Invest for babies and young children and you’re already winning. The sooner you start, the longer the money will be invested and the more your infant will benefit in later life.
Starting with this long-term approach means you can gain from the benefits of time.
However the money may be spent in the future, taking advantage of the first 18 years of a child’s life will put them in a powerful position to generate more wealth. It could make a massive difference to their life choices in early adulthood.
While you might not quite reach a million by the time they turn 18, you can make significant progress by investing in a pension or Junior ISA (JISA) from when a child is born.
Stop and think about how and where to invest
Before you rush into putting money away for the children in your life, make sure you consider your own financial situation first.
Ask yourself these five questions:
- How much can you afford to save for others after your own needs have been met?
- Where and how do you want to save the money you put away?
- How much risk are you prepared to take in pursuit of better returns?
- What costs are involved in setting up, managing and accessing the investment?
- Do you want to make your investment plan tax-efficient?
Decide which investment vehicle will suit your goals
If you’re new to investing for children, the main options are either a Stocks and Shares Junior ISA (JISA) or a child’s pension.
Investing through a JISA
A JISA is a useful long-term investment vehicle that allows you to save up to £9,000 a year (2021/22).
While parents or guardians must open the JISA, once set up, anyone can make payments into it.
One of the primary benefits of investing in a JISA is that you guarantee the money belongs to the child. Because the child is the ultimate owner of the JISA only they are allowed to access the money.
Once they reach 18, they can withdraw the money. Alternatively, they can transfer the account to an adult ISA, keep the funds invested and continue to add payments into it on a regular or ad hoc basis.
Potential returns on a JISA
If you saved £9,000 into a JISA every year from the child’s birth, the JISA could be worth £255,953.68 by the time they turn 18.
This calculation is based on an assumed growth rate of 5%.
The above sums assume all dividends are reinvested and don’t take account of fees, which will make some difference to the final sum.
Whatever the growth rate you achieve, there’s no disputing the long-term power of compound interest. If you can’t put away as much as £9,000 each year, save what you can into a JISA for your grandchildren and, over time, you should still see healthy growth while they are growing up.
The money will be free of both Income Tax and Capital Gains Tax when they withdraw money from their JISA. Alternatively, they can continue saving and benefiting from more and more compound interest by transferring their JISA to an adult ISA.
Start contributing to a pension
An alternative to a JISA is to save into a pension. This isn’t as crazy as it sounds.
As with a JISA, the pension must be set up by the child’s parent or guardian but, once in place, you can pay money in and get tax relief on payments up to £2,880 each tax year. The government automatically tops up contributions by 20% – even for a child – so an annual payment of £2,880 automatically becomes £3,600.
Of course, you can pay in more than this but you’ll only get the tax gains on the first £2,880 you contribute, unless your child or grandchild happens to have earnings above this amount.
Potential returns on a child’s pension
If you invested £2,880 into a child’s pension every year from when they are born, the pension fund could be worth £104,761 by the time they are 18.
The above calculation is based on the full invested amount of £3,600 every year, growing at an assumed rate of 5%.
If they continued to pay in at the same rate over the next 50 years, their pension pot could be worth more than £2 million. This is based on a 5% growth rate which, when you consider that the average equity market return has been around 10% a year over the past 100 years, is relatively conservative.
The above sums don’t take account of fees, which will make some difference to the final sum.
As long as the pot doesn’t exceed £2 million, any growth is free of tax, which helps it to increase in value. Like any investment, its value can go down as well as up.
Get in touch
If you want to give the children in your life the gift of a lifetime and would like to discuss all the available options or the type of fund which might be suitable, please get in touch.
Email firstname.lastname@example.org or call us on 01275 462 469.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Levels and bases of and relief from, taxation are subject to change.