How to make your child a tax-free millionaire by age 40

How to make your child a tax-free millionaire by age 40

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Jason Hollands
Published: 24 Mar 2017 Updated: 13 Jun 2022

Most people want to give the children in their lives the best start and when it comes to financial support, the earlier you start the better. Not only can making regular investments for your children generate a surprisingly significant sum over time, it can also help those making the investments reduce potential exposure to a future Inheritance Tax liability.

The common approach

Typically, discussions on investing for children focus on areas like university costs or helping them get a foot on the property ladder. In this respect Junior ISAs, which enable investment to accumulate tax-free but can’t normally be accessed until the child is 18, understandably take the limelight. The Junior ISA allowance is £4,080 in the current tax year (2016/17) and will rise to £4,128 on 6 April 2017.

Try something different

What receives much less attention is the fact that you can contribute up to £2,880 a year into a pension for a child. This is topped up by the state in respect of basic-rate tax, even though the child is unlikely to be a taxpayer. Therefore, a contribution of £2,880 is increased by £720 to £3,600 in total. While it may seem strange putting money into a scheme that your child will likely only access when they have finished with working life, it could be a move that sets them up for a considerably more secure long-term future than many of us face today.

Combining the two

When Junior ISA and child pension allowances are both maximised, a significant amount of cash can be accumulated within a highly tax-efficient environment.

While the £3,600 gross pension allowance for non-earners may remain unchanged[1], the Junior ISA allowance continues to be adjusted annually for inflation[2]. Over 18 years some £86,690 could be invested into Junior ISAs[3] and a further £51,840 into a child’s pension. This would result in a total outlay of £138,530 across 18 years, or a median amount of £7,696 per year. The pension contributions would however be topped up by the state to the tune of £12,960 to £64,800 in total.

If you assume an average compound annual growth rate of 6% (net of costs), within 18 years, the child would have accumulated an impressive £155,614 in their ISA and a further £120,017 in their pension. Left invested, without any further contributions, but continuing to grow at an average compound return of 6% per year (after costs), the ISA would be worth £580,615 and the pension £447,799 some 40 years after the first investments were made at birth. If held until the 65th year, then the combined value of these assets would be £4.59 million[4]. You should remember, though, that these rates are by no means certain and you may get back much less than this amount.

So, for a £138,500 outlay spread over 18 years (median annual contributions of £7,700), you could help a child become a tax-efficient millionaire by the time they reach middle age. That would make a great start to building financial security for anyone.

Speak to us about investing for children

To find out more about the various ways you can invest for children, download our guide or get in touch with one of our experts. Call us on 020 7189 2400 or email

[1] As it has done for years

[2] We have used the Bank of England target rate of 2%

[3] Based on an average annual allowance of £4,816

[4] Under the same average annual return assumptions


This article was previously published on Tilney prior to the launch of Evelyn Partners.