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Foster Denovo|News & blogs|Opinion|3 simple steps to making your child an ISA millionaire

3 simple steps to making your child an ISA millionaire

For many people, the thought of having £1 million would be a dream come true. With it, you could comfortably afford to pay for a house, a new car, and several long holidays abroad. With the help of an Individual Savings Account (ISA), this dream can become a reality.

There are now nearly 1,400 ISA millionaires in the UK. Many of them also started saving when the ISA allowance was much lower, meaning that it’s now easier than ever before.

If you want your children to have the best possible start in life, it’s important to think about their financial future. Here are three simple steps to make your child an ISA millionaire when they grow up.

ISAs are a tax-efficient way to grow wealth for the future

If you want to build wealth for your child, a good place to start is with a Junior ISA (JISA). You can open an ISA on behalf of your child if they are under the age of 18 and live in the UK.

While only a parent or guardian can open a JISA for a child, anyone can pay into it. For example, if their grandparents want to give a helping hand, they can freely contribute.

In the 2021/22 tax year, you can save up to £9,000 into a JISA on behalf of your child. This works out at £750 each month.

Of course, if you want to ensure that this wealth grows effectively then it’s important to find the right savings vehicle. Typically, when you open a JISA, you have two main choices:

Junior Cash ISA

This is a very popular way to save, as it allows your child to earn interest on their savings without them having to pay any Income Tax on it.

These accounts also offer a high degree of flexibility, but the trade-off with that is that they often have a low interest rate. This means that their wealth could be eroded over time by inflation.

Junior Stocks and Shares ISA

This is the other main type of JISA, which allows you to invest your child’s money. While this involves an element of investment risk, it can potentially generate greater returns than if you held the wealth in cash.

Due to the tax-efficient status of the JISA, any returns won’t be subject to Income Tax or Capital Gains Tax. This can help your child’s wealth to grow more effectively.

If you want to make your child an ISA millionaire, you’re more likely to do it with this saving product, due to the greater potential for growth. Here are three of the ways that you can maximise your chances.

1. Start early to benefit from compound growth

To increase your chances of making your child an ISA millionaire, it’s important to start early. This has two key benefits, since not only will you have longer to contribute but they’ll also potentially benefit more from compound growth.

This phenomenon can play an important part in reaching your goal of £1 million. Essentially, this is when you receive returns on the returns that your money has already generated.

While this often starts small, it can add up to a significant amount of money in the long term. This means the sooner you open a JISA, the longer your child will have to benefit from the effects of compound growth.

2. Maximise your contributions

Another important way to increase your child’s chances of becoming an ISA millionaire is to maximise your annual contribution if you’re able to.

The obvious benefit of this is that the more money you can put aside for their financial future, the closer they’ll be to the goal of reaching £1 million.

As we mentioned earlier, in the 2021/22 tax year you can contribute up to £9,000 into your child’s JISA. This means that if you start when they are born, you could potentially save up to £162,000 for them by the time they turn 18 (assuming the subscription limit remains the same).

3. Persuade them to keep it invested when they turn eighteen

The third important step to making your child an ISA millionaire is to ensure that when they turn 18 and can access it, they keep it invested and resist the temptation to fritter it away.

According to Money Saving Experts  ISA calculator, if you make the full £9,000 contribution to your child’s JISA, starting from the year they are born, by the time they turn 18 it could be worth £262,995.20. This is assuming an annual return of 5% but does not take into account the rate of inflation.

This is a significant sum, but still a long way off the ultimate goal of £1 million.

When they turn 18, your child’s JISA will be converted into an adult ISA but if they keep this amount invested, it can grow faster than you may expect.

According to an ISA calculator, if your child kept the full amount invested in a Stocks and Shares ISA while maximising their annual allowance of £20,000, it would only take 19 more years for them to become a millionaire.

Get in touch

If you want to know more about how to grow your wealth through investing, we can help. Please email us at advise-me@fosterdenovo.com or call us on 0330 332 7866 to speak to one of our team.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

 

 

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