One of my godsons recently turned 21. Time had come to give him the cash that we had been saving for him since he was a baby and we first met him. I am sure he was happy with the results which came from diligently setting aside cash of £50 every birthday. He is turning into a fine young man and £2,100 may help pay towards something useful.
My main regret is not thinking about that saving more carefully. If it had been invested for him from birth it would have easily been worth a third more and possibly twice as much as I would have been investing off the back of the three year bear market that followed the tech bubble bursting in 2000.
The problem is that when we start saving for something long-term, the end is so far away that we can’t visualise it. When he was born I had no concept of what the future would be like 21 years time and could not imagine 21 years passing. Of course now, with the benefit of hindsight, it feels like those 21 years passed by very quickly.
As humans we tend to underestimate the power of compound interest on our savings, how small amounts started early can add up and that we too will see time pass quickly.
There are huge tax reliefs available to the savings we start for children and grandchildren.
If you save into a pension for a baby, it pays no income tax but receives a 25% income tax rebate boost to its pension from HMRC. Turning £100 per month into £125 per month. The limit is £240 per month. This compounds up to equal £204,000 when the baby is 21, assuming a growth rate of 9%.
If you save into a Junior ISA for the same baby, it doesn’t get tax relief but the growth and income are tax free (as with the pension) but the funds can be accessed much more easily than the pension. The limit is £750 per month. This compounds up to equal £510,881 when the baby is 21, assuming a growth rate of 9%.
Many clients are concerned about gifting money to young family members early in life. The good news is that they can’t access their pension until they are at least age 55 (rising to 57), a double edged sword if there ever was one. The ISA can be accessed at 18, which is not always a great time for a young person to gain access to a lump sum of any size. In combination with each other though, they offer a really good balance of early and late access. If they really do something unwise with the money at 18, it might be a good test that determines whether they receive any more money in life.
If you feel as though you have missed out because your children and/or grandchildren are no longer babies, remember that the best time to start was then and the second best time to start is now.
At Altor we have been advising our clients about saving for their children and grandchildren’s financial futures from our offices in Hook and across the UK.