How saving £240 a month for 18 years could give your baby a piggy bank worth £600 , 000

MORE babies are born at this time of year than any other, with September 26 marking the busiest day for births according to official figures for 2017. Maybe the Boxing Day sales of 2016 didn’t cut the mustard after all.

Though it may not be on the minds of most new parents – whose own retirement is still a distant dream – the birth of a child is exactly the right moment for the most financially prudent to imagine their little ones in their dotage.

If wealthy parents – or grandparents – want to provide a financial gift that will keep on giving long after they themselves have shuffled off this mortal coil, then there is no better option than a pension pot. Putting aside cash in a pension now can provide their offspring with the ultimate gift of a comfortable retirement.

Jo Douglas is a financial planner at wealth adviser Brewin Dolphin. She says: ‘The rules currently allow relatives to squirrel away up to £2,880 a year in a pension for a child and have it topped up with tax relief to £3,600. Anyone starting one for a new born now and paying the maximum amount in every year would contribute a total of £51,840 over 18 years – with the pension receiving a Government top-up in the form of tax relief worth £12,960.’

Even if contributions stop at this point the pension pot should continue to grow as a result of income and capital returns. Assuming modest annual growth of about 4 per cent after fees, a pot of nearly £100,000 could be built by the time the owner of the pension is in their mid-30s.

Justin Modray, of Candid Financial Advice, says: ‘If this same person then leaves the pension untouched until they turn 65, they could eventually have a pension pot worth nearly £600,000 assuming an average annual investment return of 4 per cent. Even a £50 monthly contribution from birth to age 18 – £40 plus £10 of tax relief – would provide a pension pot of nearly £100,000 at age 65 with the same 4 per cent annual growth.’

Parents and grandparents can contribute into a pension on behalf of a child or grandchild, but they need to remember that the annual £2,880 limit applies to the child – not each adult making contributions on a child’s behalf.

Another advantage of a pension is that the long time horizon means more risk can be taken. With 55 years at least until they can draw money from the pension, parents can afford to pick racier investments such as emerging markets.

These high-risk investments can produce strong long-term returns – and although they will suffer market ups and downs over the decades, the pension pot has time to recover. Jason Hollands, at wealth manager Tilney, says a good choice for relatives is a global investment fund. He says: ‘I would suggest investing in international investment trusts such as Scottish Mortgage and F&C.’

Probably the most important reason to pick a pension over other savings plans – from the parent’s point of view at least – is that the money is locked out of reach and the child will not be able to blow it at a key time of their life when they should be planning their career.

Douglas, at Brewin Dolphin, adds: ‘A pension offers parents and grandparents the opportunity to provide a financial contribution, safe in the knowledge their child can only access the money when they are older – and perhaps a bit wiser.’

Such an advantage can also be a curse. She adds: ‘You may not be around to see your children enjoy the fruits and it’s unlikely to help with some of their major events in life such as the deposit for a first home, a car or meeting university fees. But the savings could really help them in later life when they might well need it most.’

Here are some other options:

FUN MONEY IN PREMIUM BONDS

AN increasingly popular option is to buy Premium Bonds for youngsters.

These are sold by the Government-backed National Savings & Investments and provide bondholders with the chance of winning a monthly prize of between £25 and £1 million.

Winnings are free of tax and the average prize rate is equivalent to an annual 1.4 per cent.

Having allowed parents and grandparents to gift Premium Bonds to children and grandchildren for many years, National Savings recently relaxed the rules to let all adults buy a bond for any child aged under 16.

In the 25 years since the £1million prize was introduced, ten lucky under-16s have taken home the jackpot – while loads more have won smaller prizes.

The bonds can be purchased online or by post with the minimum purchase being £25.

PROTECT THEM AS THEY GROW UP

THE arrival of a baby should not just mean planning to save for their future when offspring have flown the nest. Parents should also aim to protect their children financially in the years up to adulthood against unforeseen circumstances.

A popular option is to take out family income benefit, a type of life insurance that pays out a taxfree income each year for a set term.

So, for a plan paying an annual income of £20,000 a year and lasting 21 years, a non-smoking couple aged 30 might pay about £15 a month with AIG or Aegon, according to broker LifeSearch.

It would pay out for the policy’s remaining term upon the death of either parent.

If critical illness cover – that pays out if either partner is diagnosed with a serious illness – is included, the cover becomes expensive.

It would cost about £81 from Scottish Widows or Aegon.