How to make your child a tax-free millionaire by age 37

Exclusive research for MoneyWeek reveals how funding an ISA and a pension for your child until age 18 could build up a seven-figure sum by the time they reach 37. We look at how you can make your child a tax-free millionaire.

Two children wearing suits and holding money
(Image credit: © Getty images)

If you’re looking to save for your children, making use of tax-efficient savings such as ISAs and pension could see them enjoy life as millionaires before they hit age 40.

Diligently saving for your child from when they’re a newborn baby until age 18, while taking advantage of generous tax breaks, could turn your child into a tax-free millionaire before they hit 40.

In fact, squirrelling cash away for them over 18 years could turn a £213,840 outlay into £1,021,765 by age 37, thanks to the power of compound growth and tax relief.

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This is according to exclusive research by the investment platform Bestinvest, which looks at saving into a pension for a child, as well as a junior ISA (JISA).

“When it comes to putting some money aside to give a child a financial head start in life, most parents and grandparents will probably have in mind building up a pot of money in a junior ISA, which can help with financial challenges faced in early adulthood,” Jason Hollands​​​​, managing director of Bestinvest, tells MoneyWeek.

“However, less known about is the ability to fund a pension for a child. It may seem odd to put money aside for the future retirement of a child that they won’t be able to access for decades, but the powerful combination of time, tax relief and compound growth means it could be one of the best financial gifts you make – enabling them to live their lives knowing their retirement is substantially sorted.”

We run through how the figures add up to make your child a tax-free millionaire by the time they reach their 37th birthday, how junior ISAs and child pensions work, and how much you can contribute.

How to make your child a tax-free millionaire

Bestinvest crunched the figures to show how a parent, guardian or grandparent contributing the maximum junior ISA and pension allowances for a child each year from age zero to 18 can build up a seven-figure sum of money.

Up to £2,880 can be contributed to a pension each year for a child. Despite the fact few children pay income tax, they still benefit from tax relief, which is worth up to £720 a year.

So, if you pay the full £2,880 into a child’s pension, such as a junior self-invested personal pension (Sipp), then with tax relief added on top, a total gross amount of £3,600 can be put aside in a child’s pension each year.

With junior ISAs, there’s a maximum allowance of £9,000 that can be contributed each tax year.

“For those in the position to maximise both junior ISAs and pension contributions for a child’s first 18 years, a very substantial tax-efficient war chest could be built up,” notes Hollands.

If we assume that JISA and child pension allowances remain at their current levels, and that the contributions are made as lump sum investments each year for 18 years, then the maximum that could be contributed over 18 years would be £213,840 in total, comprising £162,000 in a JISA and £51,840 in a pension. The pension would then be topped up by the government with an additional £12,960, making gross pension contributions of £64,900 in total.

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Junior ISAPensionTotal outlayPension top-up
Maximum annual contribution£9,000£2,880£11,880£720
Contributions over 18 years£162,000£51,840£213,840£12,960

Source: Bestinvest

If we assume a 5% compound annual growth rate net of costs, then after 18 years the junior ISA would be worth £269,048 and the pension would be worth £107,619 – an impressive £376,688 combined.

Were no further contributions to be made thereafter and the JISA and pension were left untouched, the value of the combined accounts would grow to be worth more than £1 million before the fortunate beneficiary reached age 40. In fact, the calculations show that they would become a tax-free millionaire by age 37, with a pot of £729,832 that had originally been built up in the JISA, and £291,933 in their pension.

Swipe to scroll horizontally
AgeJunior ISA subscriptionJISA value 12 months laterChild Sipp gross contributionChild Sipp value 12 months laterTOTAL VALUE
18Row 19 - Cell 1 £282,813.80Row 19 - Cell 3 £113,125.52£395,939.31
19Row 20 - Cell 1 £297,283.09Row 20 - Cell 3 £118,913.23£416,196.32
20Row 21 - Cell 1 £312,492.65Row 21 - Cell 3 £124,997.06£437,489.71
21Row 22 - Cell 1 £328,480.37Row 22 - Cell 3 £131,392.15£459,872.52
22Row 23 - Cell 1 £345,286.05Row 23 - Cell 3 £138,114.42£483,400.47
23Row 24 - Cell 1 £362,951.54Row 24 - Cell 3 £145,180.62£508,132.16
24Row 25 - Cell 1 £381,520.83Row 25 - Cell 3 £152,608.33£534,129.16
25Row 26 - Cell 1 £401,040.16Row 26 - Cell 3 £160,416.06£561,456.22
26Row 27 - Cell 1 £421,558.13Row 27 - Cell 3 £168,623.25£590,181.39
27Row 28 - Cell 1 £443,125.85Row 28 - Cell 3 £177,250.34£620,376.19
28Row 29 - Cell 1 £465,797.01Row 29 - Cell 3 £186,318.80£652,115.81
29Row 30 - Cell 1 £489,628.07Row 30 - Cell 3 £195,851.23£685,479.29
30Row 31 - Cell 1 £514,678.37Row 31 - Cell 3 £205,871.35£720,549.72
31Row 32 - Cell 1 £541,010.29Row 32 - Cell 3 £216,404.12£757,414.41
32Row 33 - Cell 1 £568,689.40Row 33 - Cell 3 £227,475.76£796,165.16
33Row 34 - Cell 1 £597,784.63Row 34 - Cell 3 £239,113.85£836,898.49
34Row 35 - Cell 1 £628,368.43Row 35 - Cell 3 £251,347.37£879,715.80
35Row 36 - Cell 1 £660,516.95Row 36 - Cell 3 £264,206.78£924,723.73
36Row 37 - Cell 1 £694,310.25Row 37 - Cell 3 £277,724.10£972,034.35
37Row 38 - Cell 1 £729,832.48Row 38 - Cell 3 £291,932.99£1,021,765.47
38Row 39 - Cell 1 £767,172.10Row 39 - Cell 3 £306,868.84£1,074,040.93
39Row 40 - Cell 1 £806,422.08Row 40 - Cell 3 £322,568.83£1,128,990.91
40Row 41 - Cell 1 £847,680.16Row 41 - Cell 3 £339,072.06£1,186,752.22
41Row 42 - Cell 1 £891,049.09Row 42 - Cell 3 £356,419.63£1,247,468.72
42Row 43 - Cell 1 £936,636.85Row 43 - Cell 3 £374,654.74£1,311,291.59
43Row 44 - Cell 1 £984,556.97Row 44 - Cell 3 £393,822.79£1,378,379.75

Source: Bestinvest. Assumes 5% annual growth, net of fees.

Two more ways to boost the tax-free cash

And that’s not all. These investments could be turbo-charged even further. First, it’s possible to benefit from another government bonus by recycling the JISA cash each year from age 18 into a lifetime ISA. These accounts are boosted by a 25% top-up from the state, worth up to £1,000 each year.

Note that the junior ISA will roll over into an adult ISA at age 18, unless the teenager chooses to take the cash out. While some young adults will draw on this fund to help them get through college or university, or perhaps pay for a gap year travelling, for those thinking about using the money to get onto the property ladder, a lifetime ISA could be a smart choice. Withdrawals can either be used to buy a first home, or to fund retirement.

Second, the child pension will continue to grow. At age 37, it’s reached more than £290,000 in size, but of course pensions can’t be accessed until you near retirement (from 2028 the earliest point of access will be 57 years, and this will likely rise in future). If the pot continues to grow by 5% each year, then the value will hit £1.23 million by the time the “child” is in their mid-sixties.

“A £1.23 million pension pot for a cash cost of £51,840 (spread across 18 years) is pretty impressive,” comments Hollands.

“Alongside this, they are likely to also have accumulated some workplace pensions too.”

How do junior ISAs work?

Like adult ISAs, there are two types of junior ISA: cash, and stocks and shares. Only a parent or legal guardian can open a JISA, but once open anyone can contribute to it.

As mentioned, the annual allowance is £9,000, so you could contribute £2,000 to a cash junior ISA, while up to £7,000 is paid into a stocks and shares account. For young children, a junior stocks and shares ISA is often a better choice, because shares almost always beat cash over long time periods.

For example, if you opened a junior ISA for a baby, the money can’t be withdrawn until the child turns 18, giving you a long timeframe. So you should have time for the child’s savings to ride out any market downturns.

The £9,000 allowance is in addition to the £20,000 limit that adults have for their ISAs.

The cash inside the junior ISA belongs to the child and cannot be withdrawn until they reach 18, although teenagers can take control of the account from age 16.

How do child pensions work?

Child pensions are normally known as junior Sipps. They are similar to a junior ISA in that only a parent or legal guardian can set up the pension fund, but anyone can contribute to it.

The parent manages the pension until the child turns 18, at which point control passes automatically to them. The maximum amount you can contribute each tax year is £2,880. The government adds £720 basic tax relief (20%), taking the total up to £3,600.

You can pay money in as a single lump sum, or set up a regular savings plan.

Like other pensions, the cash is locked away until later in life: this is currently age 55, but it will rise to 57 in 2028.

Several investment platforms offer junior Sipps, such as Fidelity, Bestinvest and Hargreaves Lansdown.

Always check the fees and that you’re happy with the investment choice before signing up to a Sipp or ISA.

Ruth Emery
Contributing editor

Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.