My 21-year-old son wants to start making long-term investments for his old age. We’re not 100% sure, but think he won’t be entitled to state pension until he is 72. He is a bricklayer and doesn’t believe he will be physically able to work to such an old age, so he wants to start saving a pot of money for when he is around 60 to help him along.
He has £10,000 to £15,000 to invest in a stocks and shares individual savings account (Isa) and he may add to it in the future.
He is unmarried and has yet to buy a home. What kind of investments should he be making and what can he expect his pot to be worth in 40 years?
It’s great that your son is considering saving early on, because cumulative growth over 40 years will make a big difference to the size of the savings he can amass.
Given the long timeframe for investing, your son can afford to take on investment risk. I would suggest a broad spread of UK and overseas equities using low-cost index tracker funds. This will give him diversified exposure across different economies and currencies.
Predicting the size of the pot in 40 years’ time is somewhat difficult, as so much can change. If your son’s fund, after charges, were to grow at 7% each year, £15,000 might have grown to £224,000, worth £101,000 in today’s money if inflation is 2%.
These projections take no account of any tax incentives your son could benefit from if he were to invest via a personal pension, or the new Lifetime Isa available from April. A personal pension has the benefit that savings are supplemented by tax relief and, if your son is an employee, he should have access to a workplace pension that is boosted by an employer contribution.
Current rules put the State Pension Age at 68 for your son, but, as you recognize, this could rise. Access to a personal pension is available 10 years prior to State Pension Age. If you are correct in predicting a State Pension age of 72, a personal pension would be inaccessible until 62. It therefore makes sense to use an individual savings account (Isa) as well, which can be accessed earlier.
Another option for some contributions from April is the Lifetime Isa. The government will add a 25% bonus to contributions of up to £4,000 a year, but the money can only be accessed for a first home or at age 60.
Moneywise says: You don’t say if your son has already bought a home. He should not invest the lump sum if he’s planning on buying a house within five years and using it as the deposit.