We all want to give our children or grandchildren the best start in life and there are numerous ways to help parents and grandparents do this. However, you can also help them achieve financial security for later on in life. It could be one of the best financial gifts you could make. Here we explain how.
It’s understandable that most articles about saving for children focus on areas like meeting the costs of private school fees, building up a fund to help deal with the costs of a future degree course, achieving a lump sum to get a foot on the property ladder or cover the costs of a wedding. ISAs, Junior ISAs, bare trusts, designated accounts and discretionary trusts are among the wide range of options that could be utilised for some or all of these goals.
What receives much less attention is the fact that you can invest a gross amount of up to £2,880 a year for a child in a pension. The state will then top this contribution up to £3,600, even though the child is unlikely to be paying any tax. While it may seem weird putting money into a scheme that your child will only access when they have finished with working life, it could be a move that sets them up for a considerably more secure long-term future than many of us face.
Of course none of us know whether this £3,600 gross allowance will increase, decrease or disappear in the future but an annual contribution of £2,880 for 18 years would represent an outlay of £51,840. If the tax treatment remained constant, these contributions would be grossed up by the state by £12,960 to £64,800.
If you assume an average annualised return of 5% net of costs, that sum would be £106,340 by the time the child is 18 – more than double what you put in.
At that age, your child is an adult and you may conclude it is time for them to stand on their own two feet. They would be free to make their own contributions into a personal pension or enter a workplace scheme.
But even if you ceased making any further investments, on the pension you have put in place for the child, returns could continue to clock up – though the value of investments can fall as well as rise. For illustration purposes, let’s say these continued to return at an average rate of 5% per annum for the next 47-years until the child reaches 65-years old. By that the time, this pension could be worth £1.05 million.
That’s right – for a £52k outlay spread over 18 years, a parent or grandparent could help their child become an eventual pensions millionaire and that’s before they, or their future employers put any money into a pension. That would make a great start to building financial security for anyone.
To find out more about the various ways you can invest for children, download our guide here.