What is it?
Although it may sound surprising, it is now possible to set up a pension to save towards your children’s retirement. Not only can you invest in a pension for yourself but you now have the option of setting up a pension fund for your children or even grandchildren!
The most common form of pension is a children’s Stakeholder Pension, a government backed scheme similar to an adult Stakeholder Pension fund. The pension is flexibly designed with no regular payment commitment allowing you to stop and start payments as necessary or deposit contributions in a one off lump sum.
A children’s Stakeholder Pension can be opened from as little as £20 and you are entitled to pay in up to a maximum of £2,880 per year which will benefit from a 22% basic tax relief, increasing your balance to an attractive £3,600. Therefore, your children or grandchildren can effectively receive money that they haven’t paid tax on.
The account can be opened by anyone who is interested in the child’s future so it doesn’t have to just apply to parents. Relatives including grandparents, aunts, uncles and family friends can open a fund on the child’s behalf but the legal guardian of the child must be aware of any contributions made.
The great advantage of the children’s pension scheme is that by saving from an early age you can significantly boost your child’s pension pot, giving them a better financial head start in life than if they waited to save for themselves upon employment.
Setting up a pension for your child is a great way to save for your child’s future; it is flexible, easy to set up and benefits from tax relief, giving you tax free contribution payments and the opportunity of a lifetime’s stock market growth. This means your child’s savings will receive a substantial boost to better prepare them for retirement.
You can set up a pension for your child with as little as £20 with the option to pay in regular contributions or pay in a one off lump sum.
Research has revealed that any contributions made during the first 18 years of life could be worth more than the equivalent contributions made during the 42 years from 18-60.
There are withdrawal restrictions so your child cannot access the fund until they reach retirement age meaning you are giving them many years head start to build up a substantial amount, with tax relief benefits providing added value growth. As your child has no access to the fund they cannot be wasteful during their youth meaning they can concentrate their resources on other financial responsibilities during their adult years ( e.g. a car, marriage, mortgage) without the worry of saving for a pension.
You are permitted to pay in contributions over the £2,880 amount every year, however anything over this value will not benefit from a tax relief boost.
Your child will not be able to access the fund until they reach the national retirement age, earliest age 55. Although this can be a very attractive investment option your child may not appreciate the lengthy waiting time until they can make withdrawals, so you should try not to make this the only source of savings for your child.
Remember that tax treatments may be subject to future law and tax rate changes and the value of tax relief will depend on individual circumstances. Therefore the amount of pension income available for your child will be dependent on a number of factors such as annuity rates and investment returns when they finally reach retirement.
Need to know
A children’s pension is a great alternative or additional way to save for a child’s future. However, with a Child Trust Fund or Junior ISA your child could access the funds at the age of 18 whereas a pension cannot be accessed until retirement age, currently 55. While your child may not view this as good news, as a parent it means your child can be frugal in managing other resources throughout their lifetime. Overall they can benefit from a bigger pay out at retirement meaning they don’t have to worry about funding at this later stage in life which often many of us can find difficult.
Depending on which type you choose, children’s pensions can be opened with as little as £1 with funds earning tax free interest as well as receiving tax relief boosting the pension amount even further. You can contribute up to a maximum of £2,880 into the fund every year which from tax relief, will further boost it up to a tidy £3,600 sum.
Remember this account can be set up by anyone be it a family member or friend and if you have no children yourself you can consider setting one up for perhaps a niece or nephew.
It is important to make sure you research the different types of pensions currently available on the market to ensure you pick the right one to match your needs and circumstances. Just as you should do with any other financial investment make sure you are aware about the level of risk involved and that you have read and understand the terms and conditions before signing up to any policy.
Remember to always remain aware of future changes in government regulation that could have an effect on pension schemes and child savings. No one can predict the future of what Britain’s government will enforce over the next 50 years or so; with this in mind, do ensure that any plans you decide to take out are discussed and reviewed by a qualified IFA (Independent Financial Adviser) professional. Be sure to seek advice both before taking out any plans and throughout the lifetime of the policy to ascertain you are getting the most out of your investment as this is bound to have a significant bearing on your child’s future.