Money expert explains how to give your kids a £2.1million pension pot by saving £8 a day

Money expert explains how to give your kids a £2.1million pension pot by saving £8 a day

March 5, 2021

A MONEY expert has explained how to give your kids a £2.1million pension pot by saving £7.90 a day in their first 10 years.

Parents can give their offsprings the retirement windfall by setting up a so-called Junior Self-Invested Personal Pension (SIPP) when they're born.

The account lets you save up to £2,880 tax-free each year, and the government then tops it up by 25%, transforming it to £3,600.

This is the equivalent of £7.90 a day, or almost £245 over a 31-day month.

By leaving that money to grow in value, the sum could be worth £2.1million by the time your kids turn 65.

This is based on the investment return of a normal index tracker fund, which typically goes up by around 7% per year on average.

Of course, not all households will be able to save £8 a day for their children.

But the tip is a good example of how an early start can boost your pot thanks to compound interest, while making the most of government cash on offer.

Former financial advisor Alex Steadman shared the tip on his TikTok channel, named "That Personal Finance Guy".

He said: "Did you know that children can have a pension? From the day that they are born they are qualified to do it.

What is a Junior SIPP?

A JUNIOR Self-Invested Personal Pension (SIPP) could give your children a head start in saving for their older years.

The Junior SIPP is the same as a regular SIPP – the difference is that a parent or legal guardian manages the account.

It also makes any investment decisions until your child turns 18.

The money in a SIPP can't currently be accessed until age 55, but this will rise to 57 in 2028.

If you're looking to open a Junior SIPP, keep in mind your provider will typically charge a fee to manage your investments, which will eat into any returns you make.

Major investment platforms including AJ Bell, Fidelity and Hargreaves Lansdown all offer Junior SIPPs.

"Now this might not seem like too much of a big deal, but the really good thing is that the government will give you 25% on top of whatever you put in up to a maximum of £2,880."

"So I did a bit of a calculation, and if you put in £2,880 a year for the first 10 years of their life, just in a normal index tracker fund – that goes up on average about 7% per year.

"By the end when it comes to retirement, they're going to have £2.1 million."

Mr Steadman, who now works as a data scientist but shares money tips on TikTok, told The Sun he set the retirement age at 65 for his calculations.

Meanwhile, AJ Bell said the pot could actually be worth £2.5million by the time your child turns 66, which is the current state pension age.

However, it's worth keeping in mind the state pension for a baby born today will likely be even higher, as it's expected to rise to 67 from 2028.

You also need to consider the impact of inflation, as a 2% yearly rate would mean the pot is worth just £767,000 by the age of 66 in real terms.

Plus, remember the investment could go up as well as down so you could actually lose the money.

How to start investing

BEFORE investing you need to be aware of the risks, as unlike cash, what you save can go both up and down.

This means you can be left with less than what you started with.

And if your investment performs poorly, you're not protected for any loss by the Financial Services Compensation Scheme (FSCS) which covers cash up to £85,000 per financial institution.

Although if the firm you’ve invested with is regulated in the UK, you may still be able to use the FSCS to claim if the company itself fails.

There are of course ways to reduce the risk of investing – for example you could opt to invest in cheaper so-called "passive funds" that track the fortunes of various stock markets, such as the FTSE100 or FTSE All Share indices.

Investing in actively managed funds – that pool different types of investment together – is also less risky than just investing in individual companies, known as shares. This is because you're spreading your risk across a range of companies or other types of investment, such as bonds or property.

Robo-investing – where a computer determines what you should invest in based on a questionnaire of your preferences – also comes with lower risk as it's spreading your investments.

If you feel confident, you can start investing by setting up an account on an investment platform – a sort of supermarket of different investment products. And you can do all of this within a Stocks and Shares or Lifetime Isa wrapper. Do check the fees first – both for the platform and the individual investments themselves.

If you're unsure, you should always seek professional advice – you can use comparison services Unbiased or VouchedFor to find a suitable financial adviser.

Tom Selby, senior analyst at AJ Bell, said: "This shows the power of saving early for your kids and making the most of the free money on offer via pension tax relief."

While Sarah Coles, personal finance analyst at Hargreaves Lansdown, added: "One thing to consider when saving into a SIPP for your child is that they won’t be able to dip into the pot until they reach retirement age – this means no first car, no university fees, no house deposit.

"If you’d still like to put money away in a tax-efficient wrapper, but don’t like the thought of locking it away for so long, you might want to consider a Junior ISA.

"Your child will be able to spend their savings from their 18th birthday and their pot will still be protected from tax – they just won’t receive the tax relief on top of anything you pay in."

We explain other ways to make your child a millionaire by the time they are 65.

Plus, we reveal how you could retire a millionaire by investing £78 a month.

The Sun has previously revealed how you can give your child £18,000 on their 18th birthday by saving just £1.67 a day.

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