A PENSION is probably the last thing parents will be thinking about when they've just welcomed a newborn into the family.
But starting to save from day dot could make your offspring a millionaire by the time they retire.
Of course, raising a child is very expensive so only if you're able to comfortable doing so, consider starting a pension.
The key is to get the whole family involved, make use of Government tax perks, not just rely on cash, keep charges down and ultimately ensure you raise a diligent saver to continue the savings habit from age 18.
We take a look at the options and how long it will take you to build up a million pounds, in theory.
Here is where to start.
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Start right away
Many won’t start retirement saving until they enter the workplace.
But opening a pension for your child, typically a junior self-invested personal pension (Sipp) – before they even take their first steps will put their money to work in the stock market early.
Jason Hollands, managing director of Bestinvest, told the MoneyEdit: “It may seem odd to put money aside for the future retirement of a child that they won’t be able to access for decades, but the powerful combination of time, tax relief and compound growth means it could be one of the best financial gifts you make – enabling them to live their lives knowing their retirement is substantially sorted.”
Up to £2,880 can be saved tax-free each year, and the Government tops this up by 25 per cent, transforming it to £3,600.
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That works out at £55.38 a week or £240 a month, which is effectively boosted to £300 by the government.
This also depends on the child continuing contributions at a total of £300 a month once ownership transfers to them at age 18.
But be aware that pensions can’t usually be accessed until a minimum age of 55, and this may change as people live longer.
Even though few children pay income tax, they still benefit from tax relief which is worth up to £720 a year.
Therefore, with the added tax relief on top of £2,880 a year, £3,600 could be saved annually.
If you multiply that by 18 years you've got up to £64,900 in contributions and after 18 years the pension would be worth £107,619 (assuming there's a 5% compound annual growth rate net of costs).
Thanks to compound interest, the pension pot will continue to grow and by the time your child has reached their late 40s the pot could be worth £500,000.
By the time they're 63 the pension pot would have passed the £1million milestone, potentially reaching a huge £1,016,304.
Jason added: "A £1million pension pot for a cash cost of £51,840 (spread across 18 years) is pretty impressive."
Of course, £55 a week is a lot and may not be realistic for everyone but there are ways to make your money go further.
For example, if you have Monzo or use apps like Plum and Chip, you could round up your spending.
If you spend £9.10 on something then the round-up will put 90p into a pot – it doesn't sound like much but it adds up.
Look at what you have in and around your house, there may be a host of items you no longer use that you could sell on eBay, Depop, Vinted and even at car boots.
A Junior ISA could also work
If you’d prefer to save into an account that your child could use at a younger age, such as to help pay for university or college fees, or towards a deposit on a first home, then a Junior ISA could work.
Bestinvest crunched the figures to show how regular saving into a junior ISA could create a cool £100,000 by the time the child celebrates their 18th birthday.
A Junior Isa (Jisa) lets parents save up to £4,368 a year in a tax-free savings account that can be accessed by their child from age 18.
That may seem like a lot of money but it works out at £84 a week, so it could be achievable with the help of family and some determined saving.
Similar to an adult Isa, a Jisa can be held in cash or stocks and shares.
Returns are typically better when investing as you benefit from the power of compound interest by reinvesting how much you receive each year.
To find the best ISA, you can use comparison sites like MoneySavingExpert.com.
For example, Paragon Bank currently offers a 3.1% return – savers can withdraw a maximum of three times a year or the rate will drop to 0.75%.
But remember, if you don't use your ISA allowance by the end of the year, you'll lose it.
Get grandparents and other family members involved
You don’t have to work alone on making your child a millionaire.
Everyone has a £3,000 "gift allowance" a year, which allows parents, grandparents and friends to give money away without it incurring inheritance tax as long as they live for seven years from gifting the cash.
On top of the Jisa and pension, you could encourage family members to make use of this.
Sarah Coles, personal finance analyst at financial provider Hargreaves Lansdown, said you could reduce the clutter of toys around the house by asking for birthday and Christmas presents that help towards your savings goal.
Premium bonds – invest up to £50,000
Parents, legal guardians, grandparents and great-grandparents can invest between £25 and £50,000 into this Government-backed savings product run by NS&I.
Account holders are entered into monthly draws for cash prizes of up to £1million as well.
And savers could be in line to get more cash back after the rat increased from 3% to 3.15% in March.
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But bear in mind that many savers won't necessarily get the return so weigh up whether you think it is worth it.
There's only a 24,000 to one chance in winning the big prizes and you'd have to invest a lot to even make the running.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]
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