No trust fund? Here’s how to try and give your kids a £20,000 second income

Not every parent can set aside a lump sum in a trust fund, or hand over second income-producing assets. But that doesn’t mean we can’t give our children a powerful financial head start. One of the simplest ways to do this is by harnessing the power of long-term investing, ideally from the moment they’re born.

The most straightforward way to get going is by opening a Junior Stocks and Shares ISA at birth. This is really simple and requires very minimal time. Personally, I use Hargreaves Lansdown for my daughter’s ISA as I can process trades without a transaction fee. That’s really important as I’m not processing large investments compared to my personal ISA.

From there, it’s simply a case of making regular monthly contributions — even small amounts add up over time. By putting this money to work in the stock market and leaving it untouched, parents can take full advantage of compounding. This is the process where investment returns themselves begin generating further returns.

A £20k second income

At an average annual return of 8%, a pot could grow to around £400,000 over 23 years with monthly contributions of £500. Now think about what that means in adult life. A £400,000 portfolio could potentially produce an annual second income of around £20,000, assuming a 5% withdrawal rate. That’s not guaranteed, of course – stock markets go up and down – but it’s a reasonable target.

The point is that wealth-building is not just for those with access to trust funds. By starting early and investing consistently, parents can put time, rather than vast sums of money, to work for their children. For the next generation, that could mean financial stability, more choices, and perhaps freedom from money worries later in life.

Who knows what the ability to earn £20k tax-free will be in 23 years time. It could fund further education, or maybe they’ll choose to let it grow and contribute to it themselves.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Where to invest?

When starting a portfolio from scratch, it could be wise to gain instant diversification by investing in index-tracking funds or investment trusts. Equally, a more active investor seeking stronger returns, albeit with greater risk, could opt to invest in one or two stocks a month.

One stock I continue to like is Melrose Industries (LSE:MRO). It’s a UK-based aerospace stock that appears overlooked by the wider market, and thus something I believe investors should consider.

It has a sole-source position for 70% of its sales with advanced aero structures and engine systems on board 100,000 flights a day. It also has an established position on all next-generation major aircraft platforms.

The real excitement is the valuation. The stock currently trades around 15.3 times forward earnings but management believes it can grow earnings per share at more than 20% annually though to 2029. This suggests a price-to-earnings-to-growth (PEG) ratio way under one — a clear sign of undervaluation.

One risk is debt. In a manner similar to its peer Rolls-Royce three years ago, net debt is considerable around £1.4bn. This could drag on earnings, but it could be very manageable if earnings progress as management suggests.

The post No trust fund? Here’s how to try and give your kids a £20,000 second income appeared first on The Motley Fool UK.

More reading

• Here’s how I’m trying to build a £5.7m-£15m SIPP for my daughter
• 5 UK stocks to consider buying in September
• These could be among the cheapest FTSE stocks
• How much do you need in an ISA to target £4,000 in monthly passive income?
• This UK stock might satisfy Warren Buffett’s investment criteria

James Fox has positions in Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Melrose Industries Plc and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts