Most parents would like to ensure their children have a strong financial footing when they are older, but don’t always know the best way to do this. There are many ways to support your children financially throughout their lifetime, but what if there was a way to make them a millionaire before they even reached retirement age? Here we look at the best ways to put money aside for your children and how you can maximise the benefits of compound interest to make your child a “millionaire”!

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The first step to saving for your children’s future is understanding your saving options. Here are the most common options that benefit from tax-free growth: 

Junior ISA(JISA)

From the day a child is born you can put money into a JISA for them. The current contribution limit is £9,000 per tax year (or £750 per month) and you have the choice of a Junior Investment ISA or a Junior Cash ISA. The most important benefit of a JISA is that any gains made, or interest earned will be tax-free!

If we assume you receive an average annual net return of 5% per year and you save the maximum of £9,000 every tax year, from the day your child is born until they turn 18, you will have contributed a total of £162,000 to their account. However, due to the magic of compound interest (where you earn interest on interest), they will have a pot of over £265,000 saved in a tax-efficient wrapper, what a great 18th birthday present!

At their 18th birthday they can transfer their JISA into an Adult ISA to continue to receive tax-free interest/ investment returns.

Junior Self-Invested Personal Pension (Junior SIPP)

Setting up a pension up for your children may seem like you are overly preparing but this can actually give your children a significant head start. The maximum you can currently save into a Junior SIPP is £2,880 per tax year, and the UK government will add tax 20% tax relief of £720 per tax year, which would bring the total contribution to £3,600. If you can contribute to your child’s Junior SIPP for 18 years and again assuming a 5% growth rate, you will have contributed £51,840 but their pension pot will be worth £106,340 due to the added tax relief. If your child doesn’t contribute to the pension again, by age 57* they could have a pension pot worth around £712,986. Similar to the JISA, any gains made within the SIPP are exempt from tax, and based on current pension rules, you can take up to 25% as a tax-free lump sum upon reaching retirement age. 

Recent statistics released by the Office for National Statistics (ONS) stated how the average pension wealth for all persons in the UK is £67,800 at age 57*, highlighting how starting to save early can set your child up for their future and give them a greater opportunity in retirement or even to retire early. 

How to make your child a millionaire!

And this is how to do it! If you do the following and assume a 5% growth rate per annum:

1. Open a JISA before your child’s first birthday and contribute £9,000 every year until age 18. This results in a total contribution of £162,000 (18 years x £9,000).
2. Open a Junior SIPP before your child’s first birthday and contribute £3,600 (including tax relief) to the Junior SIPP every year up to their 18th birthday. This totals 18 years x £2,880 (or £3,600 with tax relief) which equals £51,840 (£64,800)

This would mean you will have contributed a total of £226,800 (including tax relief) to the JISA (£162,000), and Junior SIPP (£64,800). At age 18 when you stop contributing, they could have a total net worth of £372,191 when taking into account compound interest and growth. If they leave this money invested and continue to achieve 5% per year growth, by age 39 they could have a total net worth of just over £1million (£1,036,911), although the funds in the pension would not be accessible until age 57*. 

At that point the pension fund could have grown to £712,986, while the ISA, could be worth £1,782,465 if it remained untouched too - an extraordinary total of almost £2.5m. That is a gift worth giving.

The power of starting to save early

Using the same assumptions as above, with a 5% annual growth rate and maximising both Junior SIPP and JISA contributions until age 18:

This shows the benefits you can provide by starting the process of saving early for your child through compounding the interest or investment returns. This is a representation of how you can save for your children and assumes maximum contributions are made at each birthday, but we understand the circumstances for each parent and child will be different and may require different forms of financial planning, such as monthly contributions instead of lump sums.

Despite the examples above, it is never too late to start. If you would like to understand how, The Private Office can structure savings and investments for you and your children to help provide the whole family with a strong financial future. So why not get in touch for a free initial consultation. 

* Based on current pension regulation, where the normal minimum pension age is increasing to age 57 from April 2028. 

If you would like to know more about this topic, one of our Partners Kirsty Stone appeared on BBC Radio 4 Money Box live, giving her suggestions in a programme all about saving for children.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

All the calculations in this article assume that lump sum contributions are made for 18 years, from birth, unless otherwise stated, to the 17th birthday and are not adjusted for inflation.

The Financial Conduct Authority (FCA) does not regulate tax or cash advice.

The growth rates provided are for illustrative purposes only.  Investment returns can fall as well as rise and are not guaranteed.  You may get back less than you originally invested.  Investments may be subject to advice fees and product charges which will impact the overall level of return you achieve.

Chancellor Jeremy Hunt promised to ‘reduce debt, cut taxes and reward work’ in his ‘Autumn Statement for growth’, but what might the changes he announced mean for your personal finances?

In the lead up to the Autumn Statement, we discussed the changes that were rumoured to have been announced in this article.

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These speculated changes included:

• Reducing Inheritance tax
• Announcing an additional ISA allowance for investment into UK companies
• Changing the state pension triple lock calculation to limit next year’s state pension increase

In the end, none of these changes were introduced, with shadow chancellor Rachel Reeves claiming Hunt wanted to reduce inheritance tax but that he “couldn’t get away with it in the middle of a cost of living crisis”.  Instead, the headline grabbing change was the 2% reduction to employee national insurance contributions between £12,571 and £50,271.  This will equate to an annual saving of c. £754 p.a. to those earning over £50,270 p.a. with effect from January 2024.  Additionally, there were National Insurance reductions for the self-employed, with Class 2 contributions effectively abolished and Class 4 contributions reduced from 9% to 8% between £12,571 and £50,271 with effect from April 2024.

However, this will only go part of the way to make up for the impact of the continued freezing of the income tax bands, which will remain frozen until 2028.  Indeed, as a result of higher inflation, higher interest rates and frozen tax bands, the Office for Budget Responsibility (OBR) states “Living standards, as measured by real household disposable income per person, are forecast to be 3.5 per cent lower in 2024-25 than their pre-pandemic level.” 

Separately, the speculated ISA allowance increase for investments into UK companies did not materialise and pensioners will be pleased to hear Mr Hunt state the government will “honour our commitment in full” as the state pension rises by 8.5% next year.

Regarding pensions, workers will hope a new legal right for their new employer to pay into their previous defined contribution pension scheme will simplify pension planning going forward and will mean an end to the accumulation of multiple schemes as individuals move between companies.

This was an Autumn Statement with half an eye on an upcoming general election, with announcements that should put more money in the pockets of workers and pensioners alike. Mr Hunt repeatedly referred to the OBR’s forecasts during his announcement as he tried to rebuild credibility, a little over a year after Liz Truss and Kwasi Kwarteng’s ‘mini-budget’, prior to which the OBR was not asked to run forecasts. Overall, Mr Hunt will have been grateful that he was able to use some of the fiscal headroom provided by then Chancellor, now Prime Minister, Rishi Sunak’s decision to freeze income tax bands back in 2021 to offer a national insurance cut and significant state pension rise to the voting public. 

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The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.  

There is no right or wrong time to begin your retirement planning journey. Whether you are still finding your feet in the working world, or you have one foot in retirement, you need to be proactive in making your money work as best as possible for you within the timeframe that you have. Here we look to highlight some of the best tips when saving for retirement, including the  best time to get started, how much you should be putting aside and what you can do even if you’ve left it later in life. 

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When do you start saving for retirement? 

When deciding on when you should start saving for retirement, no matter the age you start, developing a monthly savings plan is an effective habit to cultivate. Setting aside a designated amount of your income automatically into a retirement pot will quickly become routine and may look something like the following: 

• The bulk going towards mandatory expenses (food, bills etc). 
• Smaller portion going towards retirement savings. 
• Try to set aside funds for living life and enjoying yourself too. 
• We also strongly recommend having an emergency fund in place to cover unexpected event or expenses. The size of this fund depends on your financial lifestyle, but a good rule of thumb is at least 3 months of your monthly outgoings.

Clearly, the earlier you start to save the easier it will be to accumulate wealth. With the benefit of compounding, you can afford to put away smaller amounts in the early years for longer rather than having to find larger amounts the later in life that you leave it. This is because compounding means that you can make returns or earn interest on interest or growth you have already received. 

When it comes to talking about wealth accumulation, the obvious elephant in the room is debt. This is the single biggest hurdle towards any savings for retirement and should be the first thing you target in your strategy. If you have numerous liabilities, it may be sensible to explore paying off those with higher interest rates first and work down. Only then can you properly focus on accumulating your wealth. 

How much should I save for retirement? 

A good rule of thumb might be to set aside 10%-15% of your income and try maintain discipline with this. As an example, assuming a 6% annual investment return a 25-year-old putting away £262 per month will have over £500,000 by 65. Notably, a quarter of this is made up from contributions with the remaining £375,000 from investment growth, further showcasing the beauty of compounding over time. 

Please note, the return on investment in the example above is purely for illustrative purposes. 

(source:https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-s…).  

Is saving for retirement worth it? 

Retirement saving is a critical aspect that is often overlooked or delayed, but in 2023, we find ourselves in a world where this topic is more pertinent than ever. We are in a time of high life expectancy, high inflation rates with a cost-of-living crisis. Without being doom-and-gloom, how amongst all this do we stay on top of future planning when the present is taking so much precedent? 

It's vital, then, that you ask yourself ‘what am I trying to achieve?’. Without addressing this at the outset, you run the risk of aiming for a goal but lacking direction. For some, the answer might be to retire at 55 and move abroad with their spouse; for others it might be to live a comfortable retirement alone. Everyone’s situation is different. 

Best ways to save for retirement in your 30s 

You are still relatively early on in your career journey and it’s often a time for lots of change, whether personally or professionally. It’s natural to be focused on immediate financial goals, but this is a time where compounding can be at its most powerful. 

You may find yourself checking your pension plan and you’re met with the reassuring reminder ‘You’re due to retire in 25 years!’. You should, however, see this as a call to action. This longevity means that it’s worth exploring higher risk assets (i.e. equities) to allow the potential of higher returns. You can take comfort in the fact that you can ride out any stock market volatility over these years. Most employers in the UK offer you a pension plan, and most will match a portion of your contributions. You will receive tax relief from the government, further bolstering the amount: 

You are simultaneously contributing to your retirement pot whilst reducing your income tax bill – what’s not to love. 

A less trodden path for people in their 30s is financial protection (insurance). However, life policies, for example, can be a great way to protect your family should you/your spouse pass away. Due to your age, you will likely benefit from lower premiums and can give peace of mind that your loved ones are protected should the worst happen. 

Best way to save for retirement in your 40s 

In your 40s, you’ve likely established your career, increased your earnings, and are saving some way towards your future. However, competing goals like mortgage payments, childcare or retirement savings are all jostling for your attention.

As you can see from the above, increased earnings provides greater potential to supercharge retirement savings. Take advantage of this by looking at utilising your £20,000 ISA annual allowance for example; this tax-free pot is a great tool for wealth growth. 

You may also have jumped around various jobs in your career by now and have small pension pots dotted around. People often forget about these until they are staring retirement in the face. One option might be to explore ‘consolidating’ these pensions into one fund. A survey from Profile Pensions recently highlighted that nearly a quarter of UK adults under 55 have lost track of old pensions worth an est. £37bn in total. Consolidating will make it easier to manage and could potentially reduce the overall fees you are paying. 

Source: https://www.cipp.org.uk/resources/news/unclaimed-pension-funds.html 

Best way to save for retirement in your 50s 

Conversely, whilst we have discussed that time is your ally in your 30s and 40s, the reverse can ring true in your 50s. You will likely have one eye on retirement and ultimately you will have to begin considering accessing your funds, otherwise known as crystallizing your retirement funds and a keyway to do this is called 'drawdown’, when you use your pension fund to provide an appropriate income. It might be prudent, then, to explore de-risking your assets so that you are less exposed to market volatility in this period. Many pension funds offer ‘lifestyle’ options which mean they automatically de-risk your investments as you approach retirement. You should check your existing structures to see how they align with your goals as lifestyling may not always be the best approach.

What if I haven’t even started? 

You may be thinking ‘I’m too late’, but there is no need to panic. You will just need to take a more disciplined approach to these retirement tips by making sacrifices and saving larger portions of income to give ‘future you’ a financially healthier retirement. Try utilising your pension and ISA allowances and, on top of your state pension, you may still reach a comfortable retirement.  

We’re currently offering everyone with £100,000 in pensions, savings or investments a free retirement planning review, worth £500. Why not get in touch and see how we can help map out your financial future to give you the retirement you want.

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Note: This article is for general information only, does not constitute individual advice and should not be used to inform financial decisions. A pension is a form of investment. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns. Your home may be repossessed if you do not keep up repayments on your mortgage. The FCA does not regulate tax advice, estate, tax or trust planning.