Saving plan is gift that will keep giving

With the birth of the royal baby, George, Prince of Cambridge, the focus is very much on babies at the moment

And while young George will never have to worry about money, other parents and grandparents are concerned to give their little ones a good start in life.

But well wishers have been warned to avoid the traditional baby gift of premium bonds by financial experts, Brewin Dolphin, who say that the Government-backed scheme is nearly as bad as putting money under the mattress.

George Slack, head of Financial Planning for Newcastle, said that the bonds “are particularly popular with grandparents but the returns are barely better than putting the cash in a moneybox for the next 18 years”.

Instead, those who wish to provide for babies less financially fortunate than the new royal baby could consider investing in a pension that might make them a millionaire by the time they come to retire.

Figures from Brewin Dolphin show that if parents and grandparents were to invest £300 a month (£3,600 pa which is the maximum allowed) into a stakeholder pension for a newborn child from birth, when that child reaches the age of 55 in 2068 they could have a pension fund worth £1,670,000. In today’s money that could provide an income of £17,800 per annum or £13,300, along with a tax-free cash sum of £107,000.

Investing in a Junior ISA could also reap handsome rewards.

If you were to invest £300 per month (£3,600 per annum, again the maximum allowed) into a Junior ISA for a newborn child when they reach 18 the ISA could be worth £112,280 or £72,770 in today’s money – this assumes that the fund grows at 7% per annum with inflation at 2.5%.

This capital will be accessible once the child reaches the age of 18 and so could be used to finance a child through university covering fees, accommodation and maintenance. The child born in 2013 would leave university in 2035 debt free.

Alternatively the Junior ISA can be converted into a full adult ISA with the full annual allowance available to continue to grow free of taxation. An attractive option as reports earlier this year suggested that there may be as many as 30 ISA millionaires in the UK.

George said: “The first few weeks and months of a baby’s life are demanding but parents shouldn’t overlook their child’s financial future. The one thing every parent can be sure of is that the costs associated with children do not disappear at 18, so a long-term savings plan is a gift that really will keep on giving.”

These figures show the potential benefits of investing in a largely tax-free environment over the long-term, and of course actual returns could be higher or lower than this depending on underlying investment performance.

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