How to make your baby a millionaire
Alliance Trust Savings has shown that parents could make their baby into a millionaire by simply contributing just £88 per month to a child SIPP.
For most parents, saving regularly is an integral part of securing their child's financial future and with the abolition of Child Trust Funds, parents could consider a child SIPP as an alternative way to provide financial stability through a long term investment plan.
Making regular contributions to a child's pension may not seem like the obvious choice for most parents. However, given the flexible nature of SIPPs and the tax relief offered by the Government, they can provide a very simple way of securing their child's financial future in retirement. For example, for every £80 paid in to a child SIPP the Government will add a further £20 to the fund.
Additional payments from grandparents and other family members for birthdays and special occasions can also help boost the funds paid into a child SIPP and will also qualify for tax relief.
By kick starting a child SIPP and contributing £88 per month, parents can ensure that at retirement their child will have a pension pot of just over £1m. The SIPP wrapper provides the child with sufficient investment choice they need throughout their lifetime.
Steve Latto, head of pensions at Alliance Trust Savings commented: "Financial planning for children is always a high priority for parents who wish to safeguard their children's financial future. We have a significant number of parents already using an Alliance Trust Savings SIPP for their children in order to take advantage of the tax relief and flexibility that SIPPs offer.”
Assumptions and notes
A contribution of £88 per month would be topped up by HMRC with basic rate tax relief resulting in a gross contribution of £110 per month.
Assumes an annual growth rate of 6%. This is the FSA's mid projection rate of 7% minus 1% for investment charges.
Based on the above assumptions at age 65 a pension pot of £1,009,000 will have been accumulated
Inflation will reduce the buying power of the pension fund at retirement. This has not been taken into account.
For a child SIPP tax relief will be paid on contributions of up to £2,880 net which will be topped up with basic rate tax relief up to a maximum annual allowance of £3,600.
This information is based on our understanding of current tax law and HM Revenue & Customs (HMRC) rules. It assumes that basic rate tax relief is available at its current rate until age 65.
The value of your investment and any income from it is not guaranteed and can go up and down depending on investment performance. You may get back less than you invested.