Five key tips to help your child retire with a £1million pension pot

World News

As Autumn rolls in and the number of births is at its peak, one expert is urging parents to focus on the financial well-being of their children instead of toys and clothes.

By considering certain tips, parents can essentially help their newborn retire with a £1million pension pot.

According to the latest ONS data, September and October are the most popular months for births with September 27 taking the top spot with 1,993 people born that day each year, on average.

Gianpaolo Mantini, a chartered financial planner and partner at wealth management firm Saltus, has outlined his five best tips for parents guaranteed to financially future-proof offspring through their milestones.

1. A junior pension and the power of compounding to generate a £1million pension nest egg

Parents can ensure their child’s future financial wellbeing by setting up a pension as early as possible. This means even small contributions have more time to grow as their child is decades away from retirement.

The maximum people can save each year into a Junior Pension from birth through to 18 is £3,600. This includes up to £720 tax relief, which the Government pays, and up to £2,880 from family members or individuals.

Even though control of the pension passes to the child once they turn 18, delaying accessing the money until they are 65, could mean they retire with a pension pot of £1million, according to Boldspace.

For example, £3,600 gross a year from birth to 18 (£51,840 net over that period), through the power of compounding (five percent each year until the age of 65, would equate to over £1million.

2. Make the most of Junior ISAs – they will help with university costs or provide a deposit for a first home:

Britons can save up to £9,000 each tax year with a tax-free ISA. Family members can contribute as much or as little (subject to conditions of a provider) as they want into the account.

Mr Mantini said: “Arguably, it will be more beneficial than buying a child another plastic toy or something that is ‘stuff’.”

He said: “Instead, you’re putting aside for the longer term, that they will appreciate when they are 18 albeit not as much now.

“Also, once a child turns 16, what’s really interesting is that you can have a Junior ISA and a full ISA in the same tax year. So a Junior ISA is £9,000 and this can be maximised for the tax year but then you’ve got £20,000 you can put into a normal ISA, although it can only be a Cash ISA”.

3. Using granny’s pension to ‘cascade’ wealth down to the next generation

Grandparents can also help to support their newborn grandchildren by leaving some money through their pensions as a way of cascading wealth down to the next generation.

Mr Mantini added: “The attractiveness about leaving a pension to grandchildren is that depending on what age the grandparents are when they die, if the grandparents are over 75, it’s taxed at the marginal rate of the beneficiary. 

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“So, If you’ve got a minor or a university child, whose receiving money from a pension, they can access it virtually tax-free because they will have their personal allowance of £12,570 a year they can utilise and this will allow them to take it out in stages.

“For example, if a grandchild has inherited £50,000 from his grandmother’s pension, this money can be put towards funding three years at university, by taking £12,570 a year completely tax-free.”

4. Tighten your belt and ditch those expensive toys and clothes

Mr Mantini explained that having a newborn essentially means the cost-of-living has gone up but disposable income has declined. New parents could be having to re-think about spending on new or expensive toys or clothes and opting for second-hand.

He stressed the importance of parents having a conversation about investing in their child’s financial future and asking themselves ‘What’s in their child’s best interest?’

Having that firm financial foundation in place for one’s child will also set them up with good financial habits that have been formed at an early stage. 

5. Ensure a Family Income Protection or Family Income Benefit policy in place to ensure the child’s financial needs are met until they are 18 in the event of a parent dying

Mr Mantini said: “During the early years, certainly until the kids are 10 to 12, the cost of childcare is exorbitant and so a family income benefit policy is like a decreasing/increasing insurance.

“So you turn around and say, well the parents take out a life cover policy and you say in the event of the death of parent 1 or parent 2 you need £20,000 extra a year just to cover the cost of childcare and so you have a policy that goes up so each year because that £20,000 increases with inflation, but you might only want it until the child is 18.

“And so if you had £20,000 a year until 18, you start with £360,000 but if you died after 10 years that’s £120,000 rather than £360,000 so the cost is a lot cheaper because the quantum of the sum assured paid out by an insurance company is a lot lower but it matches the maintenance costs, shall we say, of having a child, if one parent were to die.”

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