Make your baby a millionaireOf course, your little ones are unlikely to care for a good few years yet but when you introduce the notion of saving this should give them something to think about, when the time comes! Here's how to give your child a gift that he won't grow out of for 65 years. A newborn has nothing but time - and that's something this strategy exploits to the fullest. We'd all like to be millionaires. Money worries are something virtually all parents have to face at one time or another. As a parent, you are in the lucky position of being able to give your children a boost towards that millionaire status by starting a pension or savings plan, and taking advantage of the miracle of compound interest and a moderately generous government. According to a study by credit card provider Virgin Money, new parents receive gifts worth £660 on the birth of a new baby. This is very nice, but your baby will have grown out of all the new clothes within a month and you hardly need two new all-terrain buggies. By starting a pension with this £660 lump sum and adding your child benefit every month; by the time your baby is thinking about retirement, they could already have a million pound pension fund. First step - start a pensionPensions immediately conjure up images of elasticated knitwear and poverty. However, their bad reputation isn't completely justified. They just make the most of the miracle of compound interest and a moderately generous government. Put simply, a pension is a long term savings plan which receives a tax boost from the government. The money you pay in is invested to produce long-term growth. There are many providers and investment strategies available, all offering different levels of risk. Normally, you start your own personal pension, and use your earnings to pay into it during your career. Setting up a pension for a baby means that the parents pay into it initially, but the child can choose to continue it later on. The pension provider charges annual fees to manage your fund. The level of charges for stakeholder pensions is capped by the Government at 1.5% of the fund value per year for the first ten years, and 1% afterwards. The stakeholder model is a low-cost personal pension plan. The tax breaks The major advantage of a pension is the tax-breaks. To encourage people to save for retirement, the Government will 'top-up' any contributions you make by either 22% or 40%, depending on how much income tax you pay. If you are a standard rate taxpayer and put £100 into a pension, the Government will add £22. For higher rate taxpayers, £40 will be added for every £100 invested. This effectively means that when you pay in £100 to your fund, £122 or £140 is actually added to the balance. Only the first £2808 invested every year will be topped up in this way. The Government gets this tax back when you retire. The monthly income you receive is taxable, just as if you were paid a salary. The advantage is that during the time you hold the pension, the additional money contributed by the Government helps to increase the fund value. Route to a millionStarting a pension is a fantastic financial boost, although it doesn't mean that your baby won't need to save for their retirement independently. They can continue to pay in to the fund you have established, or join an employers pension, or start their own scheme later in life.Here are the steps to take:
Before you decide...Although the idea of making your child a millionaire is tempting, there are potential drawbacks which you need to factor in:
AlternativesIn order to make your baby a millionaire, any money invested has to be left alone to grow over a long period of time. If you are unsure about tying the money up for 50-60 years, you can adopt a mix-and-match approach with some money in a pension as well as using your child Child Trust fund allowance (CTF). Child Trust Funds Babies born after 2002 receive a £250 Child Trust Fund (CTF) Voucher. When the child reaches the age of seven, the Government pays in another £250. You can choose between savings, shares and stakeholder accounts. The latter two invest in equities, and carry all the associated risks. You can put up to £1200 per year into a CTF account. The account is in the name of the child, so when they reach 18 they can withdraw the money tax free. If they want to blow it all on inappropriate members of the opposite sex and partying, sadly there's nothing you can do about it. A CTF account is rather like an junior ISA. It has the same tax advantages, but a lower annual contribution limit and a smaller range of providers. If you find that you have money to spare, consider using some of your ISA allowance to build up a tax-free lump sum. This has the advantage of being in your name, so you have more control over what it is used for! Whatever method you choose, make sure you shop around for the most competitive account, and change providers if you aren't happy. The pensions system is undergoing huge changes. Future pensioners will have to take more personal responsibility than ever before for their retirement. By saving for your baby, you can give them a gift that they won't grow out of for 65 years. by Olwen Jones Where to next?
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