Building Generational Wealth: The Case for a Child Pension
Author - Jonathan Pollock
A child's birth is a major life event for any parent. It starts a continual process of thinking how best to provide for that child. This can be around setting up life cover to ensure if anything happens to you, they’re protected. Or it could be setting up a savings account, so the family can invest in the child's later life through something like a Junior ISA.
To create generational wealth, many have not considered an alternative that uses compound interest. That alternative is a child pension - a golden opportunity to pass wealth between generations.
Each tax year, you can contribute £3,600 per year (with 20% tax relief) into a pension for your child from the day they are born. Over 18 years, this will equate to a contribution of £64,800 into their pension. If you made no further contributions and you had an annual return of 5%, when your child turns 60, they would have £473,087.24 sitting in their pension*. This does not consider any other pensions they contribute over their working life, or any inheritance you hope to pass onto your child.
The golden rule with this is compound interest. Compounding is the interest you earn on interest. For example, 10% per year on £100 over 3 years will compound £110 after the first year, to £121 in the second year, to £133.10 in the third year. Your returns get reinvested and receive growth from the returns on the returns.
As discussed in my previous article, the power of long-term investing, the three main variables in investing are:
- Money in - Amount you invest
- Investment Strategy - What are your investments
- Time invested – length of time you have been invested
Allowing this money to be invested over a 60-years, where your children can’t withdraw from the pension until the minimum allowed age, allows this money to potentially multiply many times over - ensuring three generations are speaking about you beyond the grave.
If you want to move into building generational wealth for your family, this is a brilliant opportunity for you and your children. Making a small contribution now through surplus income will have a big effect in many years’ time for your children. The Government reminds us that many don’t have enough saved for retirement. Why not ensure that your children will be comfortable in their later years?
To summarise, generational wealth is an aspiration that many would like to achieve. If you want to be one of those people, setting up a child’s pension is an easy place to begin. If you want help understanding the principles of investing and compounding, please get in touch via jonathan.pollock@sjpp.co.uk or +44 7527275684.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
*These figures are examples only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.
