How to beat the taxman and build a £1 million portfolio for your children

• Families can invest £9,000 a year per child in an ISA and £2,880 in a Junior Sipp topped up with £720 tax relief
• Using Junior ISAs and pensions shelters the assets from the taxman
• Assuming 4% annual growth, parents could hand each child £336,000 at age 18
• It means a family with 3 children could build up £1m to give their kids a financial headstart

Laura Suter, head of personal finance at AJ Bell, comments:

“Wealthy parents or grandparents can build savings of more than £1m for children by the time they turn 18 by maximising the Government’s tax-free savings schemes. Parents of three children can use a combination of starting early, hefty contributions, pensions tax relief and investment growth to hand their kids a collective pot worth just over £1m by the youngest child’s 18^th birthday.

“Children benefit from generous allowances on tax-efficient accounts, with parents able to save up to £9,000 a year per child in a Junior ISA each tax year, as well as £2,880 in a Junior SIPP each year. Both accounts benefit from tax-free growth on the investments, but the SIPP will also receive pension tax relief of £720 each year, per child, topping up the annual contribution to £3,600.

“By starting from birth and maxing out the annual allowances from birth, parents could hand each child £336,000  by age 18, assuming growth after charges of 4% a year.  

“In total parents can set aside £641,520 for all three children before they turn 18. Boosted by around £366,000 in pension tax relief and investment growth it means a family with three children could give them a combined £1m financial headstart.

“The Junior ISA will become the child’s own savings once they hit their 18^th birthday, with the account rolling over into an adult ISA. The pot would be worth around £240,000 per child at this point, for them to keep invested or choose to spend on further education, a house or the world’s flashiest gap year.

“Meanwhile the Junior SIPP money will be tied up until the child’s retirement age, which is currently age 55 but is rising. Worth close to £100,000 at age 18, it could provide a launchpad toward a comfortable retirement in the future.

“While lots of parents stick to cash for their children’s savings, an 18-year time horizon is the ideal period to take more risk and invest the money. It’s the best way of getting inflation-beating returns over that period and could significantly boost your child’s wealth.

“Clearly putting away £11,880 a year per child isn’t attainable for lots of parents, but they can draft in grandparents or other family to help reach that sum. Any grandparents gifting money need to be aware of inheritance tax gifting rules, which mean that IHT could be due if they die within seven years of the gift. Each person can gift up to £3,000 per year before they hit this limit, as well as additional amounts for weddings or regular gifts.”

Source: AJ Bell. Assumes £9,000 annual contribution to Junior ISA and £2,880 annual contribution to Junior SIPP, topped up with pension tax relief, with both getting investment growth of 4% a year after charges.