The best way to save for your children and grandchildren
Many of you wish to set aside some money to help your children when they get older.
There is one way of saving for your children, which trumps any other available option.
That option is to save into a personal pension.
Many people don’t realise that you can save into a personal pension from birth.
I’m not suggesting we should return to child labour and send your children off to work so they can save their own money!
But parents, grandparents and even the government are able to help provide for your children’s future.
There are many benefits to this approach, which I will outline for you below.
How much can you save?
Firstly let’s cover how much you can contribute. Presently you can save up to £3,600 gross each year into a personal pension and obtain tax relief from the government.
So you can save £2,880 each year (£240 each month) and the government will add the rest (£720 pa) to make the gross contribution of £3,600 pa.
If you save from age 0-18, you could put £64,800 into a pension for your child or grandchild.
That’s a pretty good start.
(correct in 2016).
Presently your children won’t be able to access their pension funds until they reach the grand old age of 57.
This is a huge benefit for two reasons.
Firstly it removes the ability of them wasting the money at age 18, when they won’t necessarily be financially responsible (I know I certainly wasn’t).
You don’t want to spend years saving only to see your sacrifice and generosity end up in the hands of nightclub owners and car modification companies.
Secondly it ensures that your contributions are invested for a long time, which brings me to the next major benefit.
Letting compound interest work it’s magic
Compound interest basically means making money on top of money.
At a magical compound return of 7% each year, your money pretty much doubles every 10.
Imagine how much could be available if these funds are left alone to compound for over half a decade.
All those extra years of compounding returns will work wonders for your children and grandchildren’s future wealth.
Combining compound interest and time pretty much ensures investment success. You can largely forget about worrying about volatility and invest patiently into a portfolio of shares.
(Note: Whilst you could reasonably forget about volatility from a financial planning viewpoint, you have to also psychologically forget about volatility, which isn’t actually a very easy thing to do).
Saving and investing £240 per month for 18 years and achieving a long-term investment return of 7% pa (not an unreasonable assumption), would leave your child or grandchild with the tidy sum of £1,791,728 in their pension fund at age 57. (That is not a typo).
Remember that in a pension, these funds grow almost entirely tax-free.
Gifting your children retirement security and comfort
When you also factor in the likelihood of state pension reductions or the risk of outright removal in the future, this would be an especially wise financial decision; a gift that your children and grandchildren will be eternally grateful for.
They just might not realise the true value of your wise gift until they reach retirement.