How to make £1 million for your children

Becoming a parent is not just about buying nappies, formula and baby grows. For many mothers and fathers it is also about setting up their children financially for whatever life throws at them.

All you need is a birth certificate to set up an Isa or pension, and while 18 years might not be long enough to save £1m, your child can be well on their way to a house deposit by the time they become an adult.

Unlike the £20,000-a-year adult Isa allowance, the amount you can stash into a Junior Isa or "Jisa" has risen and now stands at £9,000 per child.

For two years – for 16 and 17-year-olds – you can save into both a junior and adult Isa in the same tax year, meaning you could in theory save £29,000 in a single year. The catch is that you can only save money into a cash adult Isa, not a stocks and shares account, when you are under 18.

You can also invest into a pension, known as a Junior Sipp, but while tax relief means this pot could grow much faster than money left in an Isa, it is not accessible until the age of 55 at the earliest.

How £9,000 a year can turn into £1m 

If you maximise the Jisa allowance every year, then over time you could build up a pot worth £1m, including investment returns – but you will need to be patient.

Rob Morgan, of wealth manager Charles Stanley, said: “Unfortunately, making your child a Junior Isa millionaire by age 18 is unlikely to be achievable. An unrealistic annual growth rate of 17.5 per cent after charges is required to hit seven figures at that age.” 

However, the portfolio could reach £1m later in life, even if no more contributions are made after their eighteenth birthday.

“An annual growth rate of 5.9 per cent after charges would turn the £162,000 invested between birth and age 18 into just over a million by age 40," Mr Morgan said.

A growth rate of 5.9 per cent per year is pretty impressive – but certainly not unthinkable. Global stock markets have produced an annual growth rate of 8.1 per cent over the past 30 years. This is why, in pursuit of high returns, it is worth taking on the risk of the stock market. 

One way to iron out the volatility of equity markets is to invest regularly. “By contributing either a lump sum or series of lump sums every year totalling up to £9,000, or a direct debit into the account for up to £750 a month, you buy more shares or units when prices become cheaper and fewer when they become more expensive,” said Mr Morgan. 

This strategy – known as pound cost averaging – can give you peace of mind because it will reduce the overall risk within your portfolio. Even if you put in a small amount each month, compound interest means the sum can snowball. 

However, if you can afford to put away the full lump sum of £9,000 each time, then you probably should — as you stand to receive compound returns on the whole amount for longer. Our guide to how – and how fast – you can become an Isa millionaire explains more.

Where to invest for a £1m portfolio 

Choosing the investments that will deliver the best returns is another key ingredient in building a large portfolio, and one that is harder to get right, for obvious reasons.

If, in 1993, you had put £26,369 into the Jupiter European fund – the best-performing fund of the past 30 years – then today you would have a portfolio worth £1m, according to the investment platform Hargreaves Lansdown.

By comparison, if you had invested £26,369 into the L&G FTSE 100 tracker 30 years ago, then you would have £195,589 today. This tracker has had a total return of 641.73 per cent, whereas the Jupiter European fund has returned almost six times that. 

This data is compelling, but it should not persuade you to bet everything on one horse. Investing in just one company or fund will leave you highly exposed if anything goes wrong (remember that 50 per cent of actively managed funds close within the first ten years).

Diversification is the key to a resilient portfolio – so even if the Jisa is entirely invested in the stock market, you need a mixture of investment styles and exposure to different markets around the world. 

Emma Wall, of Hargreaves Lansdown, the stockbroker, said: “All long-term investors should have exposure to both developed and emerging markets, offering opportunities to benefit from different drivers through the market cycle.” 

The other key to investment is to stay the course. “For most retail investors, the most sensible approach when markets become bumpy is to do nothing – if you are invested for a long time horizon, as is typical for a Jisa, it is more detrimental to tinker than exercise inertia,” said Ms Wall.

“Make changes triggered by human events rather than markets – such as a manager changing at an actively managed fund for example, or a change in investment style, rather than a short period of underperformance.”