Making your child a millionaire
Making your child a millionaire may evoke unpleasant pictures of the spoiled offspring of the wealthy, casually splurging the riches that their parents and grandparents have carefully built. Indeed, if you haven’t worked for something you probably don’t value it too much.
It’s also true that learning to work for what you receive is a good lesson in life. But we aren’t talking cash-free gifts to splurge on partying and illicit substances here.
A typical school leaver these days might have the prospect of financing themselves through university and then finding a place to live in a British city suffering bloated property prices.
A handy starter fund can be the difference between taking that university place or not, holding out for the job they really want instead of one that just pays the rent and … not having to pay the rent – because they own their own starter flat.
The first step is easy … and free! Since 2005, the Government has given a £250 voucher to the parents of every new-born child, to invest.
The aim of the Child Trust Fund is to reinvigorate the savings instinct in Britons, and hopefully to make us less dependent on the state as we grow older. You can’t invest the cash just anywhere – there is an approved list of providers.
But you DO have the choice of putting it in a regular savings account or investing it in shares. Savings will give you a return of around 4% a year, but why play safe? Invest in shares and history tells us you will get a return of around 11%. And as you’re investing over the long term (18 years till your child’s trust fund matures) you can afford to take a few risks. Let’s be conservative, factor in charges and say you’ll get 8% a year.
That £250 will have grown to £1050 by year 18. But let’s not leave it there. Parents can add another £1,200 a year to the CTF, which will be allowed to grow, free of tax. There aren’t too many tax free savings vehicles on offer, and this should be grabbed with both hands. By maturity you would have added £21,600 to the Govt’s £250, but the pot would have grown to over £49,000. You, meanwhile, would have saved a stack of tax – higher rate taxpayers would have saved more than £8600 over the term.
A second tax efficient way to enrich the little ones is to make them cash gifts. The Inland Revenue lets you give £3000 each year to an individual. Gift this to your child, and invest it in a shares ISA, again we’ll assume 8%. Your investment of £54,000 will have grown to over £120,000.
We’re always saying that it’s never to early to start a pension. But at birth? Bizarre though this sounds you CAN do this for your kids, and with a pensions’ crisis already looming this could be an excellent idea. Remember, the basic state pension in the UK is only £3150 a year. Even topped up to the guaranted minimum income rate, it’s only £90 a week. And, with ever increasing numbers of old people to support (because we’re all living longer) that’s unlikely to change for the better. Invest the maximum £3600 for your child, and you get tax relief (from April 2008) of 20%. So you’ll only have to invest £2880 a year.
By year 18, you’ll have invested £51,840. The total investment will be £64,800. And with growth at 8% a year, the pension pot is worth £144,000.
Add your pension, CTF and gifts together and you have a pot of £313,000. If your offspring didn’t touch the money (and of course they CAN’T get at the pension part), this would grow to over a million pounds by their 33rd birthday.
They WILL need to spend the cash of course … that’s why we’re saving in the first place. But now comes a lovely example of how spending can be saving too. Junior goes off to university. You encourage them to save by BUYING a flat instead of renting. They can take £40,000 out of the pot to buy a £200,000 flat. They can even make a bit extra by renting out rooms to fellow students. They hang onto the flat once they leave university and it grows at 7% a year. By the time they hit 45, their flat is worth a million pounds.
Okay, we’ve simplified the figures here. Some of your investments will do better and some worse. Rates of return will change, and some of these investment vehicles will disappear (to be replaced by others of course). But what you should see is the stunning effect of compound interest on fairly small amounts of cash. Hopefully, this will be clear to your lucky child too and they will have acquired a taste for saving. … and they will be investing in a tax free ISA each year.
But even if they’ve made a big dent in that £313,000 during university and are left with a pot of £200,000 at age 21. If they NEVER touch it again, that 200,000 will grow to over £2m by age 60. As the wise investor said when asked for his investment advice. ‘Start 20 years ago!’ You really are giving your kids a head start here.
Links: Child Trust Fund
Tags: making your child a millionaire, Child Trust Fund, Childrens Trust Fund, millionaire children, trust fund babies, trust fund babys