Expert Victoria Scholar on difference between saving and investing
Taking advantage of tax-free investments from birth can guarantee your child millionaire status, according to finance experts.
Investing the maximum sums allowed into Individual Savings Accounts (ISA) of Self-Invested Personal Pensions (SIPPs), which ensure any returns and growth are free of tax, should be the central aim.
And following this path could deliver millionaire status by the time they reach 43, say investment experts at Hargreaves Lansdown.
The firm’s head of retirement analysis, Helen Morrissey, said: “Becoming a millionaire may feel like an impossible dream for most of us, but if you can start people off early on their investment journey, it’s more achievable than you might think.
“Starting your loved one’s savings journey early gives them an enormous advantage over the long-term. The increased time in the market can really pay off. It can also act as an important early lesson in the power of investment in making the most of their money. Watching their money grow over time can boost their confidence and spark a lifelong interest in investing.”
How to reach the magic million through the ISA route
Contribute the full £9,000 per year to a Junior ISA from birth could give your child a nest egg of more than £255,000 by the time they reach 18.
If they continue to contribute £5,000 per year to their ISA then they would reach £1m by the time they are 43.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “Junior ISAs are a great way to get your loved ones’ investment journey off to a flying start.
“You can contribute up to £9,000 per year with any withdrawals made free of income tax. A great benefit of these products is that even though the money within the JISA belongs to the child, they cannot make any withdrawals from it until they hit 18.
“We estimate that if a parent or grandparent contributed the full £9,000 per year to their child’s JISA then they could have a savings pot of over £255,000 by the time they reach their 18th birthday.
“If they were to keep investing in what is now an adult ISA and contribute £5,000 every year, then they would hit the magic million by their early 40s.”
How to reach the magic million through the SIPP route
If you were to contribute the full £3,600 per year allowed into a Junior SIPP they could have a pension pot worth almost £98,000 by the age of 18.
If they were to continue to contribute £200 per month (£2,400 per year) to their SIPP they would have a pension pot worth one million by the age of 61.
Children watching their money grow over time can boost their confidence (Image: Getty)
By the time they hit state pension age at 68, this would have swelled to almost £1.4m.
The firm’s head of retirement analysis, Helen Morrissey, said: “The annual allowance on a Junior SIPP is much lower than for a JISA at £3,600 per year, but contributing could give your child a retirement nest egg worth just under £100,000 by the time they reach age 18.
“This is a significant leg up the retirement savings ladder especially when you think most of their peers will not even begin contributing to a pension until they are auto-enrolled at the age of 22.
“If they were to continue paying in £200 per month from the age of 18 they would hit the magic million mark at around age 61.”
Fund ideas for a Junior ISA
Troy Trojan
Aims to grow investors’ money steadily over the long run, while limiting losses when markets fall.
Invests in a mix of investments including shares, bonds, commodities and currencies and includes some of the world’s best-known companies with highly recognisable brands.
The fund has the flexibility to invest in higher-risk smaller companies and while the fund contains a diverse range of investments, it is concentrated, which is a higher-risk approach.
iShares Emerging Markets Equity Index
A way to access a broad spread of companies in the diverse emerging markets.
One of the lowest-cost options for investing in these markets, which could help the fund track the index closely.
Could boost long-term growth potential, but with the potential for volatility along the way.
Legal & General Future World ESG Developed Index
Aims to provide long-term growth while being environmental, social and governance focused.
Invests more than the broader global stock market in companies that score well on a variety of ESG criteria, such as the level of carbon emissions generated and number of women on the board. If companies score poorly on these measures the fund reduces exposure.
Invests in around 1,400 global companies, focused towards sectors such as technology, pharmaceuticals and financials.
The fund has the flexibility to use derivatives which adds risk if used.
FSSA Asia Focus
This fund is run by a manager and team with a great pedigree of investing in Asia.
Fund manager Martin Lau has an impressive track record of picking some of the region’s best-performing companies over the long run.
The fund invests in higher risk emerging Asian countries.
Junior ISAs are a great way to get your loved ones’ investment journey off to a flying start (Image: Getty)
Fund ideas for a Junior SIPP
Schroder Asian Alpha Plus
The managers look for what they believe are high quality growth prospects in Asia and benefit from the support of a large team of analysts based across the region.
They look for companies with good cash flows, strong franchises, a quality management team, superior corporate governance standards and a strong business model that’s able to defend against competition.
The fund could be a good option within the Asian portion of a globally diversified portfolio.
The fund can invest in smaller companies, companies based in emerging economies and derivatives. These can all increase risk.
FTF Martin Currie UK Mid Cap
The manager invests in medium-sized companies, often considered the ‘sweet spot’ between company growth potential and maturity.
Fund manager Richard Bullas is an experienced UK small and medium-sized companies investor and benefits from the support of a well-resourced team.
The fund could be a useful option for the UK portion of an adventurous portfolio or work well alongside funds investing in larger UK businesses to achieve broader UK stock market exposure.
The fund can invest in smaller-sized companies which can increase risk. It tends to hold a relatively small number of companies which means that each can make a meaningful difference to performance, both positive and negative, increasing risk.
