Turn your kids into millionaires!

Find out why it's crucial to help your kids climb the pension ladder as soon as they're born.

I'm sure, if you're a parent, you'd like to make sure your child has an adequate pension. Recent research from Aviva reveals that almost half (47%) of parents say making sure their child saves in? a pension is a key priority.

The trouble is, the ideal time to start your pension is in your 20s - and very few 20-year-olds can afford to. Most have enough on their plate, what with all their student debt and their struggles to get a foot on the property ladder, never mind finding a job.

And this situation is only set to get worse in the future. So if your child is still very young or even a baby, believe it or not, it's wise to start planning for their retirement right now. This can pay huge dividends for your child later.

In fact, if you start early enough, you might be able to turn your child into a pension millionaire!

This is possible even if you can't invest a huge fortune on their behalf today. Believe it or not, small sums now can generate a million pound pension pot when they come to retire, especially if the pension has more than 60 years to grow.

Don't believe me that you can turn your kids into pension millionaires? Here’s how to do it:

Cash in on free money from the Government

The Government might have scrapped the Child Trust Fund scheme, but there is still a way you can get up to £720 a year free from the Government for each of your children.

This is because current pension rules allow you to open a pension on behalf of your kids, and tax relief on all your contributions.

Believe it or not, this is the case even if your child is a non-taxpayer. Contributions made into a child’s pension are eligible for tax relief at the basic rate of 20%. This means, if you pay £80 out of your own pocket into their pot, £100 will be invested in total once tax relief has been added on.

If you paid the maximum contribution permitted - that is, £240 a month or £2,880 a year - the total amount going into the pension would be £3,600. So that means your kids will benefit from an extra £720 free from the government every year!

How do your kids become millionaires?

Let’s imagine you pay in the maximum £240 a month from the day your child is born until they reach their 18th birthday, with the contributions rising by 2.5% a year to take into account inflation. This could generate a pot worth £69,400.

From the age of 18, your child takes over the contributions themselves, and continues to pay in the equivalent of £240 a month in today's money until they retire at 70.

Remember normal retirement age is rising, and it’s entirely feasible that children born now won’t retire until they reach 70 and possibly beyond.

These contributions could generate a pension pot worth £839,000 at retirement. To reach the one million target, your child would need to increase their own contributions from £240 a month (in today's money) to £325 a month (in today's money) from the day they turn 18. This could create a pension pot at 70 worth exactly £1,000,000 in today's money!

These values are generated based on the following assumptions:

• Your child's contributions keep pace with inflation by rising 2.5% a year;
• Contributions qualify for 20% tax relief throughout increasing from £325 to £406 a month;
• The fund grows at 7% a year;
• The final value is in ‘today’s money’ which takes inflation into account at a rate of 2.5% a year.

Do your kids need to be pension millionaires?

Err no! I’ll be the first to admit that contributing £325 a month is no easy feat for most savers. The figures purely demonstrate that it's possible to reach a million without investing an absolute fortune. And besides, a million pound pension pot will provide a far greater income than most of us will ever need once we retire.

Recent question on this topic

• hammer asks:

  I am contributing £110 per month in order to receive a monthly pension of £123. Am I stupid? Should I save in an ISA instead?

  • 
    SoftwareBear answered "How old are you now ? What age does this plan say you will retire ?..."
  • 
    hammer answered "I am 58 and retire in 8 years...."
  • Read more answers

So, what size pension pot might a more affordable contribution produce?

If you paid a £100 a month into your child’s pension for the first 18 years, and they then took over the same level contributions until they reached 70, their pension fund could be worth £353,907 in today’s money. Rerember in year one, the total contribution is £125 a month with 20% tax relief, and contributions rise by 2.5% a year to keep pace with inflation.

This could provide a fixed annual gross retirement income of £27,685. This figure also takes inflation into account and assumes that income is paid to your child only - that is, there’s no provision for their spouse/partner.

Adding extra benefits

At retirement there’s also the opportunity to take 25% of the accumulated pension pot as tax-free cash. If this option is chosen, a tax-free lump sum of £88,477 could be drawn from the fund which would reduce the annual income to £25,829 in today's money - still a very generous retirement income for most pensioners.

Even if your child wanted to inflation-proof their income during retirement, and provide an income for their spouse/partner in the event of their death, they would still end up with a pretty reasonable income for themselves. To achieve both of these things, the initial income at the outset will be reduced to £16,722.

By sacrificing a portion of the payout to begin with, the pension will increase by 3% each year to safeguard its purchasing power against erosion by inflation. What’s more, by accepting this lower level of income, your child can also provide their spouse/partner with an income in their own right worth half what they were drawing from the pension pot themselves.

(Note that all the same assumptions shown in italics above apply to these calculations.)

I know all this seems an awful long way into the future, but you can see creating a healthy pension pot for your kids is completely achievable. By starting as early as possible, the miracle of compounding over many decades can work wonders for the final value of their pension pot.

More: Why delaying your pension makes sense | Help! In my forties and still no pension