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As with all investments capital is at risk and the value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.
Back in February, a newspaper article caught my eye: ‘Money saving tips to make your child a millionaire’. I obviously had a peek and loved what I read because it is such a simple idea!
The reality is it isn’t an article about tips. It’s one really straightforward tip – get a pension open for your child as soon as they are born. Children’s pensions aren’t something I had really considered before for my children but the article was eye opening.
In the article, Rob Gardner, a campaigner for financial education and co-founder and CEO of Redington, says that if you put £5.50 aside every day from the day they are born until your child reaches the age of 10, this can grow into a £1 million pension pot by the time they reach 65. You wouldn’t need to contribute anything else after their 10th birthday.
Read that again.
Here’s how it works. Pension contributions attract tax relief so with this additional money from the government, your £5.50 is actually £6.88 per day. Plus, over time, your pension pot will roughly double every decade due to the power of compound interest.
The secret is to start saving as early as possible – open a pension for your child. You get 25% free from the government. And you can expect your investment to roughly double every 10 years. So the earlier you start, the more they will have when they choose to retire.
Let’s crunch some numbers
Much as £1 million pension pot for your children sounds fabulous, how many people can realistically afford to put away £5.50 a day? Especially if they have more than one child.
I was speaking to a colleague at work the other day and something she said really made me think. She said ‘I could lose a pound coin down the sofa every day’. So last week I had a chat with Rob about what the numbers look like if you save £1 a day.
Same assumptions as his original calculations:
- No more money is ever invested after their 10th birthday
- The pot of money doubles every 10 years (based on 7% growth)
- The government tops up contributions by 25%
By the time the child reaches 10 years old, £1 per day would total £3650 saved. This would be worth approximately:
- £140,000 at age 55
- £275,000 at age 65
Now, if you could afford to continue to invest £1 per day for another 10 years until the child is 20, but then stop all together at 20 years old, the numbers get even more impressive. A total of £7500 would be saved over the 20 years. This would be worth approximately:
- £210,000 at age 55
- £420,000 at age 65
I’m sure it’s not just me that thinks that £420,000 is a pretty amazing gift to your child for the sacrifice of the cost of a cup of coffee every other day during their childhood.
Short vs long term savings goals
Setting your child up with a pension and making regular savings in to it while they are children means that when they start work, they already have a head start on their pension. They can then focus their savings in the early years of their working lives on short term goals whilst their pension continues to grow for them. Doubling away every 10 years.
The last part of what Rob says here is really powerful.
We all know that the experts say we should start saving in to a pension as soon as we start working to benefit from the power of compounding.
The reality is that most 20 somethings are not focused on what their life is like when they retire; they have more short term goals – enjoying their freedom to travel, home ownership, having children (and anyone with kids knows they cost an arm and a leg!)
Imagine being able to give your children a head start with their retirement savings so that when they start working, they can focus ALL of their efforts on achieving those short term goals. The investments you made for them in their early years would keep doubling away for them in the background.
I was sold.
Best of both worlds: a JISA and a children’s pension
We currently invest in to JISAs each month for our girls. My discussion with Rob has helped me consider that by spreading that investment across a JISA and a pension, we can give them the best of both worlds.
A JISA will legally belong to a child from the time that they turn 18. Some children will choose to use it to pay towards further education or a deposit for a house. Others could fritter it away on nothing in particular. I’d hope my girls won’t spend the money we have saved for them on useless things but who really knows.
Do you know your future 18 year old child? What will they do?
I’d like to be able to give my own children some money to give them a great start in life as adults, but also, a great start for their longer term future as well.
I am opening up a pension for them both this month so will be writing about my experience of the process to help anyone else encouraged by this great savings tip. I’ll also be clarifying what the limits are for children if you are fortunate enough to be able to invest more than £1 a day.
One thing I hope you take away from this is that with just a small contribution from an early age, your children’s pensions could be the single best thing you ever do for them. Have a think about what you spend £1 on every day…
Rob is the founder of Redstart, the financial education charity which I wrote about last year. He is also author of the book ‘Save Your Acorns’ which my girls love. I can highly recommend you watch his TEDx talk ‘If you leave your children one thing, make it this’…