As my daughter just turned one, I’ve been reflecting on her first year and wondering what the future will bring for her and how we as parents can help and support her.
As you know, I like to think long term.
Student loan
I know that I don’t want her to have a student loan – they are a burden too heavy on young people.
In the UK students loans work out to be more like a tax. Once a graduate earns more than a certain amount of money (depending on the loan taken out it can be as little as £17,775 per year) 9% of their pay is deducted directly from their salary until they have paid it all off. This also means that students cannot pay off their loans early – a clear downside.
This is why when my daughter was born I started putting away £100 each month and investing it in a Nationwide Junior ISA that yields 3.25% interest, permanently. Because if she doesn’t take out a student loan we’ll probably have to support her, and £100 a month now is better than hundreds of pounds in 17 years! I think of it this way:
£100 x 12 months x 18 years = £21.600 PLUS interest
The interest rate will change eventually – and I will shop around for the best one – but it is set at 3.25% for the foreseeable future. It is currently added only once a year (10 months after I opened the account, then every 12 months), so that after 18 years her savings account will amount to a total of £22,349.
Pension
My husband and I are firm believers in pensions to pay for our retirement. Or at least part of it.
I set up a pension account with Virgin Money in my daughter’s name soon after she was born. I’m paying in only £30 per month – but she gets a 40% tax credit on top of that because her pension account is linked to me (her parent) and she gets the same tax credit I get.
I will probably stop paying into her pension when she turns 18 (although that is not set in stone), so this is how much she’ll get:
£30 (contribution) + £12 (tax credit) x 12 months x 18 years = £9,072 PLUS fund income from pension fund
Fund are not as straightforward to calculate as interest, but assuming a growth rate of 3%, after 18 years her pension pot will be worth £9,375. And this is just till she’s 18 years old.
This will probably not be sufficient for a full bachelor, and we will have to combine our strategy with other tactics. Yet I believe that £130 a month will translate into a great support for her in the future.
These amounts are taken out automatically from my bank account, so I can then focus on enjoying my time with her and nurturing her interests.
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