Pensions and children don’t often share an article.
The children don’t tend to like them because pensions are boring, and besides, Peppa Pig is about to start, right?
Whilst pensions aren’t the first thing that comes to mind when you start a family, new research shows that a head start can make your little darling over £250,000 better off by the time they are 67.
A study by Retirement Advantage shows that a £100 per month saved on behalf of your child from birth to the age of 18 would grow into a pension pot of £284,316 by the time they are 67, assuming a growth rate of 4%.
Of course, this depends on investment returns. You could get more or less than this depending on how your investments perform.
If the pension was opened at the age of 30, a minimum monthly contribution of £214 would need to be paid in to reach the same sized pot. Compounding growth can turn a relatively small investment now into a large pension pot with 67 years of history behind it. It can also get children into the habit of saving, which if we all think about our own personal saving habits, is something that can never start soon enough.
The Pensions Technical Director at Retirement Advantage, Andrew Tulley, commented: “A pension could be one of the best gifts you can give children or grandchildren. It may seem daft to think about a pension when you’ve just started a family, but it could be the best financial start in life.”
Why stop there? Can we make the pot even bigger?
Before you go running off to plant an acorn, there are various rules that your oak tree must abide by. This is a pension after all!
The basic rules for paying into a pension for your child:
• Maximum contributions of £2,880 per year (topped up to £3,600 in tax relief by the Government)
• A minimum deposit of £20 per month is generally required by most providers
• Your child won’t be able to access it until they are 10 years away from the State Pension age. If your child was born in April 2017, the State Pension age would be 68, but it is generally accepted that the Government will legislate to make it even higher
• The child takes ownership at age 18 and can continue payments, leave it to grow or transfer to another provider
Are there any downsides to a child pension?
The restricted access until your child is in their 50s means that the money can’t be used for anything else. A lot of big costs can arrive close together in early adulthood, such as higher education, buying a house, a wedding, or even having children of their own. The Centre of Economic and Business Research (CEBR) reported last year that the average cost of raising a child to the age of 21 is £230,000. Retirement is a long way away, so having no access to the money could be a problem if it is needed elsewhere. The average student loan debt is estimated to be around £40,000, so some people may prefer not to have a large sum of money tied up when it can be used for something else.
Andrew Tulley raises a further concern, commenting: “Although successive governments have a habit of changing the pension rules and moving the goal posts, you shouldn’t ignore taking full advantage of both tax relief and compound interest when thinking about savings for children.”
Whatever your preferred method, saving for your children can have huge benefits if you start from day one. Thinking about when they need the money, probably dictates the method used to save for them.
• If they will need money for things such as private education, university, weddings or house deposits, you should consider investments and savings which allow the necessary access, for example ISAs, Junior ISAs, Help to Buy ISAs.
• If your concern is giving them a head start with their retirement planning, the pension with the additional tax relief may be more attractive.
The answer may well lie with a combination of the two.
As mentioned at the start of this article, pensions and children don’t meet each other very often, but as explained here, when they do the effects may surprise you. A pension could be one of the best gifts you ever get for your child. It might not be the most exciting, but when they are 67 they are way more likely to appreciate a £284,316 pension pot than all of the roller skates, pogo sticks or ice cream cones in the world.
We’re here to help. If you’d like more information about saving for your children, call Sarah or Bev on 01159338433.
A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. Reliefs from taxation are subject to individual circumstances and are subject to change.