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Make my child a millionaire? Really? On my income?
Actually yes. Even with small amounts of money at the start, with some savvy planning, you can take advantage of tax-efficient ways to invest for your child.
Thanks to time and the wonder of compound interest you can make them a millionaire in adulthood. Here are some of the ways to do it.
Invest as Early as Possible
You can open various accounts and even a pension for your child from the day they’re born (they must be registered first!). That is the best as the longer the money is invested for them, the greater it will grow.
But it doesn’t matter if you already have teenagers and haven’t invested for them yet. There’s still time to build a fund for them and boost their financial future in a tax-efficient way.
Small Amounts Add Up Fast
Small amounts regularly invested over a long period of time will help ride out market highs and lows, while compound interest helps build the fund over many years.
So, it’s better to start saving even small amounts for your children in their own accounts now rather than squirrelling it away in your own savings and giving them a lump sum when they turn 18.
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It’s also tax efficient to set up financial products in your child’s name, as they have their own tax-free allowances each year you can take advantage of.
So, instead of using some of your ISA allowance of £20,000 a year to build their college or house deposit fund, you can set aside savings into their own financial investments.
Set Up a Junior ISA
Your child is entitled to a Junior ISA, which is a tax-free savings or investment account. That means they will not pay tax on any interest or growth that happens within the account.
The annual allowance for a Junior ISA is currently £9,000 per tax year (April 6 to April 5) – so if you manage to save the full amount from the ages of 0 to 18, that’s £162,000 in the pot even without the added growth of the investment and the effect of compound interest if you keep the interest, or value increase of shares in the account.
A Stocks and Shares ISA is a great way to get your child’s money to grow. They generally do much better than Cash ISAs and you can afford to take some risks with the money as there is plenty of time for their funds to recover if the investment goes down for a bit.
The account hands over control to them when they turn 16, but they can’t withdraw until their 18th birthday.
However, it’s a really good opportunity to teach them about investing and the advantages of leaving money in a product for a good long time.
Keep them informed of how the investment is doing from age 16 and they are likely to want to keep it going when they are 18.
Set up a Pension for Your Baby
Everyone is entitled to a pension, even if they don’t work. If you don’t work you can put in up to £2,880 per tax year into a pension and the government adds in the tax you would have paid on it which brings it up to £3,600 if you put the full amount in.
This is what happens if you put money into a pension for your child too. It’s a great way to build up a fund for them, even though you might not be around when they finally come to draw their pension.
LATEST DEVELOPMENTS:
Investing in a Self-Invested Personal Pension (SIPP) leaves a lasting legacy that means they’ll face a more secure retirement in the future.
SIPPs are ideal for your child’s pension because you can choose the investments within the pension, giving you total freedom over which stocks your child’s fund holds.
And setting up a pension when they’re young means there are literally decades for the funds to grow.
It’s also a tax-efficient way to leave them a lasting inheritance that falls outside of Inheritance Tax rules (currently). What’s even better is, even though they don’t pay tax as a child, they still benefit from the tax relief – adding an extra £720 a year onto a full £2,880 pay-in.
Buy Premium Bonds
While Premium Bonds aren’t the most impressive in terms of returns (on average they are equal to savings account interest), if you’ve paid in the maximum to a Junior ISA and child’s pension pot for the year, it’s worth considering them as an extra way to invest for your child if you have the spare cash.
That’s because there is still the chance they might win one of the monthly prizes – or even the big million-pound prize. And the prizes are tax-free.
Many parents like to purchase a small number of bonds each year as a gift, or encourage family to do so. You can buy from as little as £25.
Jasmine Birtles is founder of the self-help financial site MoneyMagpie.com
