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How to future proof your kids’ financial future

Your kids’ financial future is going to be a long game.

This article on your kids’ financial future comes courtesy of Long Weekend from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

Generation Alpha parents – those with kids born between 2010 and 2025 – need to get creative. Based on the traditional adult measures of success, our kids are screwed. They face monster student debt, job insecurity, and house prices to the moon.

Excelling in the school system may or may not pay off. Taking a job is being replaced by the entrepreneurial making of a job. Kids will need to cultivate a toolkit of strategic thinking and collaboration skills in order to solve new world problems in novel ways.

I don’t know about you but I was not familiar with this language – let alone the principles – until I entered the workplace.

In this brave new world, sitting down to plan your children’s accompanying money blueprint will never be time wasted.

Here are three ideas1 for building your kids’ financial future.

1: Open a Junior ISA

The Junior ISA limit is now a generous £9,000 a year. That is a punchy number to fill every year, especially if there are siblings.

However let’s say you were able to put in the maximum from birth until your child(ren) hit 18 years. They would then leave school with a pot of £350,000, based on a 7% growth rate.

These kind of sums are only achievable by investing in the stock market via a stocks and shares JISA. In contrast, with a cash JISA your child will probably end up with less money than you invest in real terms, due to inflation.

Once you have overcome the first hurdle of saving £9,000 per child, you hit the second JISA challenge.

In the words of Gandalf the Grey “with great (investing) power, comes great responsibility”.

Your kids’ financial future in your hands

As the parent or guardian, you have a limited time window to positively influence your children’s financial literacy and hence your kids’ financial future.

They can access their JISA money in their late teens. Before then you’ll need to impart your hard-won wisdom on delayed gratification, saving for something special, giving to worthy causes, the power of compound interest, and budgeting.

They are not going to learn this stuff at school. It’s on you.

Regular automatic investing into a stocks & shares JISA sets your children up for success on their next adventure. That could be university, starting a business, or a deposit for a house. They will have money to put to work.

If you are new to investing, a JISA is a great training ground for buying and holding for the long-term. Once invested, only the junior recipient can access the funds on turning 18. This removes your ability to withdraw and hopefully the temptation to sell or tinker.

How to set up a Junior ISA

Estimated admin time: 1 hour

  1. Select a low-cost broker from Monevator’s broker table. I choose Charles Stanley Direct. Open the account online. This requires proof of ID and you’ll need to set yourself up as the nominated contributor to pay in funds.
  2. Choose a low-cost fund, with global exposure. Do you own research but for ease take a look at Vanguard Lifestrategy 80% (accumulation). Invest a lump sum, or select monthly payments.
  3. Save your the log-in details in LastPass. Then forget about the account, at least until the next tax year.

2: Open a Junior SIPP

My mum scoffed at me setting up a Junior pension for my daughter. The timeline of 60-plus years seemed meaningless. My mum argued that by the time my daughter could access the pension, she’d have her own money.

I see it differently. A Junior Self Invested Personal Pension (SIPP) is a wise investment.

Firstly, as with an adult pension, the government pays tax relief on a kid’s pension. This is the equivalent of 20% free money from the Government.

Parents or guardians can can pay in £2,880 and this is topped up to £3,600 per year. I will always take free money from the Government, thank you very much.

Secondly, the power of compounding works best on a long-time line. Sixty years is about as long as it gets!

Use the Monevator compound interest calculator to get a sense of what’s possible. An investment of £3,600 x 18 years, which is then left to compound2 (no further contributions) until they are 60-years-old would give your precious a pension pot of £2.2million, from an initial investment of £50,000.

That is not a typo.

Admittedly £2m will be worth a whole lot less in 60 years. But it’s still a very generous patronage.

I plan to only tell my daughter about her family-funded pension when she’s established herself both personally and professionally. Imagine being told, aged 35-40 year, that there is money put aside that will allow you to pursue your passions, pay off your mortgage, and invest in your children’s and grandchildren’s future!

I’ll need to wait a long time to be proved right. That said, I’m feeling pretty bullish.

How to set up a Junior Pension

Estimated admin time: 1 hour

  1. As per the ISA, select a low-cost broker. For the purposes of diversification and protection from Internet hacking, choose a different provider. For example Best Invest. Its pension performs well in terms of low fees
  2. Again, choose a low-cost fund, with global exposure. Given the long investment timeline, you might help your kids’ future by choosing an ESG fund, too. Vanguard’s own ESG fund saw returns of 34% over the last 12 months. This growth isn’t sustainable (excuse the pun) but it proves that ESG investments needn’t inevitably compromise returns.
  3. It will take roughly a month from investing to receive the extra Government 20% (max £720) into the account. Set a reminder to invest that, and then forget it until next year

3: School of Life investing

We’re witnessing explosive growth in DeFi (decentralised finance). If my child were in their late teens and obsessed with Roblox, Fortnite, and Axie, I would be tempted to set them up with a little money in an account, subscriptions to newsletters such as Real Vision and The Defiant, and suggest they put their metaverse skills to work.

With supervision, it’d be a fun, gamified, way to learn about returns, lending, and yields. It also flexes their research skills. It will help them find authentic and knowledgeable voices for advice. Most significantly, Defi is your kids’ financial future. It will impact their work, money and investing, communications, and ownership. Starting this learning journey early is only going to help.

In her coming secondary school years years, I also intend to gift my daughter roughly £1,000 to set up a business during the summer holidays.

Again, the learning curve is huge, from selecting a product or service, learning how to sell, problem solving, managing a budget, branding and IP.

I’ll be rooting for what she creates and hope her business succeeds.

But in this instance the journey will be more important than the destination.

In time you will be able to see all Long Weekend’s articles in her dedicated archive.

  1. I’m not an accountant or financial advisor. I’m a mum who’s educated herself on personal finance. Please do your own research and make your own investment decisions. []
  2. This is based on the assumption that the annual investment of £2,880 remains the same for 18 years with an annualised return of 7% per year. []
{ 23 comments… add one }
  • 1 diy investor (uk) June 28, 2021, 12:09 pm

    Good to see the Vanguard ESG fund suggested for a long term pension option. Hopefully we will see a lot more funds which exclude the fossil fuel companies gaining favour with the investment community. (Maybe just check the returns figure for past year?)

  • 2 xxd09 June 28, 2021, 12:38 pm

    Interesting
    Raised 3 kids -all married-all working-all with children so walked the walk!
    Never had any intention of leaving them any money and told them so from a young age-any monies left over after educating them would be spent by mum and dad!
    However spent a lot of money (and time) on them re education-comprehensive school but music lessons ,swimming and foreign holidays -also paid for 5 years of uni-no student loans
    That was it
    Kept a very small house -ideal for a retired couple ie us-no room for anyone to come back
    Seemed to work
    However we were not that well off.Two of my kids are very well off and their children know it -it will be interesting to see how successful they are as parents installing a work ethic etc
    xxd09

  • 3 slg June 28, 2021, 1:42 pm

    I love the idea of gifting them money to set up a business in the summer hols. Its made me realise I have no idea to do this myself so I could also do this for me so I can then pass on the learning!

    I have stakeholder pensions for my kids that is “a savings account which the PM adds an extra 1/4 onto and then you lend it to 100s of businesses across the globe so that when they make money, they give you some of that money back too.” It gets an eye roll from my eldest (8) everytime, but I’m hoping it will be a useful lesson with their own money that S&S aren’t scary and produce great returns over time.

  • 4 ZXSpectrum48k June 28, 2021, 1:47 pm

    I agree with Junior ISA. At £9k/annum it’s a worthwhile amount. Albeit I think it’s probably on Rishi’s list to chop. I don’t really see the risk with them getting it in their teens. The probability they ‘spaff it up the wall’ is low but this is futher reduced if you never happen to tell them about it.

    I don’t really agree with the Junior SIPP. It’s too small an amount for the hassle, the fees on some of the SIPPs eat into that small amount, and taking a six decade+ view on tax is too much of a leap of faith (and I don’t do faith).

    Making money via Roblox though is a good idea. One of my primary school kids is now a “Roblox creator” having already earned a four figure sum in the last year making utterly pointless crap via that game. Much better hourly rate than newspaper rounds or sweeping chimneys. The total addressable market of desperate parents across the globe who’ll do anything to shut up a child who wants that next shiny thing is just huge. I know, I’m one of them.

  • 5 Andrew June 28, 2021, 2:13 pm

    Somewhat agree with XZSpectrum48k on the Junior SIPP. We’ve had year after year of threats against curbing pension tax relief and reducing pension allowances.

    This talk of a flat 30% in tax relief marries up with what the government did with the Lifetime ISA, so my expectation is that before I reach retirement (I’m 35) pension schemes will be replaced entirely. Perhaps it will happen slowly, by simply reducing the annual allowance and upping the Lifetime ISA allowance, but the writing is on the wall.

    As for the Junior ISA… it seems ripe for exploitation. I mean, a nod and wink between parent and child and the money can be gifted back after they turn 18.

  • 6 BuildBackBetter June 28, 2021, 2:44 pm

    Another issue with junior SIPP is, it can eat into LTA for the kid. But again, better to use a benefit while it lasts.

  • 7 Lostpupp June 28, 2021, 2:54 pm

    Re Junior SIPP: I plan to only tell my daughter about her family-funded pension when she’s established herself both personally and professionally

    Would you really have any control over this? How can you prevent her from finding out about this at age 18, and doing whatever she wants, including extracting it all and incurring huge tax penalties?

  • 8 Rosario June 28, 2021, 4:22 pm

    Some great idea’s on here especially the less common such as gifting money to set up their own businesses. I have heard this before but, beyond Mr Money Moustache, I’m not aware of anyone reporting the outcomes. It would make for an interesting read.

    Generally I’m a believer in applying your own oxygen mask before helping others. Even your own kids. So I would first make sure I’m at least subscribed up the pension LTA and filling my own ISA every year prior to opening anything in my children’s names specifically. You always have the option of gifting them something from your own ISA as they need it.

    We happen to contribute our child benefit and any ad hoc amounts into a specific fund within our ISA’s so that its value is easily tracible should we want to gift it to them in future. This also helps as it forms one pot which can be sub-divided as you see fit rather than exposing your children to sequence of returns risk on their investments and them ending up with differing amounts depending on when they were born and who was around to gift them money at that point (thinking contributions from Grandparents etc).

    Our intention is to educate our children as well as possible on the importance of (as Long Weekend puts it) ‘delayed gratification, saving for something special, giving to worthy causes, the power of compound interest, and budgeting’ etc etc and I’d see the opening of a S&S JISA with them as a useful tool for this.

    Another point on pensions is that they are in my eye primarily useful as a tax deferral tool and therefore to get the most out of them one needs to maximise the employer match and contribute at levels of income which exceed the basic 20% band (for however long that option remains). Therefore I think by contributing to your child’s SIPP, as well as taking legislative risk, you aren’t getting the best value on the inputs based upon the current rules.

  • 9 Dave Hedgehog June 28, 2021, 6:43 pm

    I agree with @Rosario’s perspective that parents should apply their own oxygen masks first. There’s no point in parents locking up money in a Junior ISA or child SIPP if they aren’t on a secure footing themselves. Certainly one’s own SIPP/pension should be the priority if not on track for a comfortable retirement yet, or if you’re a higher/additional rate taxpayer not yet in danger of breaching the LTA, to get the huge tax uplift. Better to increase the overall family wealth, which can always be passed onto kids later.

    This flowchart does a good job of showing what to prioritise: https://flowchart.ukpersonal.finance/

    At the end of that flowchart, where it says to use a taxable account once other options are exhausted, is where you should consider Junior ISAs and child SIPPs in my opinion. To get there while maximising one’s own ISA and SIPP you probably need to be earning around £90k, which is a 96th percentile income in the UK (source: https://www.gov.uk/government/statistics/percentile-points-from-1-to-99-for-total-income-before-and-after-tax).

  • 10 Long Weekend June 28, 2021, 6:55 pm

    Thanks for the comments. My financial education has been and continues to be down to the wisdom of strangers on the internet. Most notably The Investor and the Monevator community.

    Point taken around the risk posed with a Child SIPP. I don’t anticipate receiving a state pension and I’m sure all other pensions formats could look very different in decades to come. I’d hope products could be transitioned in light of any major changes. As per Child Trust Funds transferred into JISA’s. However as per @ZXSpectrum48k and @Andrew, this might be a leap of faith.

    @slg Nice approach. Worth the eye rolls.

    @xxd09 It feels to me that university landscape is shifting, given the spiralling costs and inevitable disruption by ed tech platforms and the likes of Google career certificates. My thinking is that my daughter (currently primary school age) weighs up the option of a degree against alternatives. If she concludes it’s right for her, the ISA is there to fund fees and expenses. Re. Work ethic, I often think about this when reading about those seeking FI whilst their children are young. So interesting.

    @Rosario You make a good point about saving for siblings.

    @diyinvestor Will check, thank you.

    @Lostpupp I can’t withdraw the money so I’ve already given up control. My whole plan relies on trying to financially empower and educate. Time will tell.

    @ZXSpectrum48k Respect on the Roblox creator success.

  • 11 xxd09 June 28, 2021, 7:42 pm

    What I what I would change with hindsight
    My bargain with kids was I pick up the bills -you pass the exams
    Seemed to appeal to their innate sense of fairness
    I should have done some more financial education but then I knew very little at the time
    We all know so much more now
    Would it have worked or improved matters?
    I remember they all inherited a little money at 18 and immediately spent it!
    Money is useful but without good management (in this case-parenting) it will be of little use -indeed could make things much worse!
    xxd09

  • 12 Planalyst June 28, 2021, 9:07 pm

    Good ideas for investing in a child’s future in this article.

    Like most other comments on here, we prioritise our own ISAs and don’t invest in a JISA for our daughter. It’s primarily for her grandparents to send larger monetary gifts to her. Mainly for her future but also as part of their estate planning now to ensure her inheritance from them is tax free. With the compounding of her JISA investments over the years, she will have plenty of money when she can get her hands on it to fund whatever she wants. Hopefully she’ll keep at least some invested, but time will tell if she listens to us at that point!

  • 13 Jonathan B June 28, 2021, 10:37 pm

    I’m with @xxdo9. We picked up music lessons, extracurricular sport, holidays that enhance life experience… but she has to do the work for exams.

    Now she’s at university we fund the shortfall in maintenance (but no more, she does some part time work for that which in itself has proved very educational). And no fees, I am convinced by the arguments of Martin Lewis among others that the loan is better unless after-graduation income reaches significant levels.

    What we have done, since we found ourselves with cash following an inheritance, is contribute to a Help-to-buy ISA for her. And interestingly, she must have picked up on our discussions about where to put money and asked for advice about diversifying her building society savings – so after passing on the headlines from reading Monevator she is now (over 18) the proud owner on her own behalf of a small low fee S&S ISA containing LifeStrategy 80. Possibly the start of an ongoing financial plan.

  • 14 Matthew June 28, 2021, 11:20 pm

    To encourage the child to work whilst helping them we could simply top up their wages by x% – so you make the targets easier but they still have to work to reach them and have some sense of personal accomplishment and value what they get and are motivated to get more.
    I worry about complacency if they see an account in their name, which outweighs tax advantages. Also, gold diggers.

    Incidentally though, helping our kids with our rare knowledge is why the rich get richer.

  • 15 E&G June 29, 2021, 12:53 am

    100% with Rosario here. Kids will also reap the benefits of decades long growth with whatever is left in our investments but without sacrificing the freedom and flexibility to spend it in advance of that time. It also helps with the fairness headache – sequence of returns, how do you make sure whatever you put away for the six year old ends up about the same as the baby etc. If you’re troubling your own ISA and pension allowances then there’s an argument for utilising the kids’ but on the other hand if you’re in that position then they are hardly likely to want for a lot.

    My attitude might be partly ideological – I don’t think I’m due anything from my parents when they go and would rather they spent it while young and fit, and my view is a parent’s role is to equip their kids with the skills and security to go and make the most of their lives. If one needs a wee hand up in adulthood so be it but the taps should be turned off at 22.

  • 16 K. June 29, 2021, 10:52 pm

    You forgot a bare trust fund …

  • 17 Naeclue June 30, 2021, 1:24 am

    Junior ISAs were not available when my kids were growing up, but I am unsure whether I would have used them even if they were. Kids can so easily go off the rails once into their teenage years and may not get back on until they are into their 20s. Providing 18/19 year olds with large amounts of cash can be highly detrimental to their wellbeing. I have witnessed this so many times. In one Instance it contributed to the very tragic death of the son of a University friend.

    One of the best ways to future proof kids financial future is by early and consistent use of the word “No”. Get that right along with instilling an ability to live frugally and they will be setting off on the right tracks.

    If you do want to help your kids out financially, I would suggest holding on to your money and then helping them buy property when the time comes.

  • 18 Fi lite June 30, 2021, 8:51 am

    An interesting post, thank you. You mentioned that you gift your daughter £1,000 to set up a business yearly. Can you also go into detail on that?

  • 19 In my shed July 1, 2021, 11:12 am

    Generally it is a good thing to set up saving and investment accounts for your kids and teach them about money, value etc. We set up an ISA for our daughter to help with University life as she is very intelligent. Unfortunately she never went, she got 13 good GCSEs but fell in with the wrong crowd, dropped out in the middle of her A levels and once she was 18 blew all her ISA (several thousand pounds) on alcohol, drugs and expensive tat inside of 6 weeks. She left home at 17, missing for months. She has returned now complete with baby, can’t get a job. Just a warning that teenagers over 16 are very empowered but all the responsibility is still on the parents. We thought we knew our daughter, but outside influences turned her head post 16 and there was little we could do. We certainly couldn’t stop her accessing her ISA at 18. I would advise being very careful about handing over large sums at 18, maybe spread your child’s savings in ways you have more control over in case things go pear shaped. I would recommend watching the BBC mini series “Three Girls” as this is almost exactly our experience. If you think it can’t happen to you, you are wrong and it might be worth mitigating that risk, however small you think it is. It was two and a half years of hell for us and one of the reasons I retired early (absolutely mentally exhausted). Things much better now thank goodness.

  • 20 Alex July 1, 2021, 5:41 pm

    I’d agree with Lostpupp #7 – trying to hide accounts after someone turns 18 would be a challenge. The provider is legal bound to only take their instructions at that point and if you try to keep the account login details you’re opening yourself up to a host of legal problems.
    That said, I set up JISA & JSIPPs for both my kids (6 & 3) on the basis they probably need spending money at uni but the JSIPP should be outside any income / assets / affordability calculations and it should also be protected in any potential divorces as it’s not going to be co-mingled (e.g. using the JISA for a joint house purchase).

  • 21 slg July 3, 2021, 6:38 pm

    @long weekend. Thanks

    Some great ideas and watch outs on here.

    The pensions are part of a wider strategy for the kids.

    I have also been paying £4.30 a month into a junior cash isa for both kids since birth.
    £26 goes into stakeholder pensions on birthdays and Christmas.

    £1 a week.

    The lesson between these 2 is Cash vs s&s with pension tax advantage with their own money.

    I know what lesson I want them to learn. The lesson they actually learn will probably be different and “tax man takes 25% of withdrawals” or “it takes a long time to save this and no time at all to spend it”.

    There are also parts to the strategy but this is the investing one.

    I can’t wait to see what they do….. Its their life, their choices, their lessons. I trust them.

    That being said… . If one of them leaves home, comes back with empty pension and isa and a baby…. @ in my shed, your post made me go cold all over.

    I am going to remain optimistic /naiive until crisis calls for something else.

  • 22 Naeclue July 6, 2021, 6:27 pm

    @In my shed, thanks for sharing that and you have my sympathies. Thankfully none of my turned out that bad, but one of them would have wanted to continue bumming around the world after her gap year if she had had the money to do it. That would have been annoying enough.

  • 23 Steve August 16, 2021, 6:14 pm

    Bit late to the party on this, but my daughters’ Junior ISAs are with Fidelity. They don’t charge a service/platform fee at all for JISAs, so that seems the cheapest place for them (then they’re in low-cost passive stuff – as you’d hope from a reader of this site – 80% equity. Not VLS, but a cheaper homemade version).

    They’re only 5 and 8, so it’s perhaps daft to try and second guess what they might do with the money when they’re 18 (if they had it now they’d be looking on UnicornTrader.com), but my vague plan is to explain their JISAs well before they can access them. What I don’t want to find myself doing is hovering by the letterbox to intercept post from Fidelity (or wherever the JISAs are then) the day after they each turn 18. Really don’t want a degrading tug-of-war with the postman in front of the neighbours…

    thank you for the wonderful site BTW (and regards to ‘DIY Investor’ – love your books)

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