When you have children or grandchildren, it’s normal to want to be able to provide for their future in some way.
Creating a savings account, or perhaps even a Junior ISA (JISA), are popular strategies to do this. But one method you may not yet have considered is creating a pension for them.
Pension saving for a child can be one of the best ways to set your child up for the future.
Even though they won’t be able to access it until they retire, the tax relief on offer, alongside the potential for investment returns over a long period, makes pensions an effective vehicle for providing your children with a future income.
That’s why a pension can be an effective way to save for your children or grandchildren.
A good target for saving
As there is for adult pension saving, pensions for children have an Annual Allowance. For children, this limit is the lower of either £3,600 gross or 100% of the child’s earnings, if they have any.
This limit is the maximum amount you can invest into a pension in a single tax year while still receiving tax relief.
Tax relief sees the Income Tax you would have paid on that money invested into the pension for you on top of any contributions.
In real terms, that means for every £80 you contribute to the pension, you receive £100. As a result, you only have to invest £2,880 to fulfil the children’s Annual Allowance of £3,600.
Broken down monthly, this £2,880 presents a reasonable and achievable savings target of just £240 a month towards your child or grandchild’s future.
Among other types of pension scheme, you could use a stakeholder pension or a junior self-invested personal pension (SIPP) to save for a child.
A stakeholder pension has a default investment strategy, taking the pressure off you to make decisions, while you choose your own investments using a junior SIPP, meaning you have more control over the returns that the pension can generate.
Parents or legal guardians need to open the pension, but after that grandparents or other family members can make contributions.
Compound returns make early saving highly effective
Opening a pension for a child can be particularly useful because of the amount of time the account has to grow from investment returns.
In turn, the extra value of the account generates returns too. This is known as “compound returns”, a phenomenon that Albert Einstein reportedly once referred to as the “eighth wonder of the world”.
Consider this example from Unbiased that shows how compound returns can provide your child or grandchild with a decent pot for their retirement.
Imagine that you invest £2,880 into a junior SIPP, receiving 20% tax relief to top it up to the maximum of £3,600. Presume that you do this every year until your child or grandchild’s 18th birthday.
Next, assume an average return of 4% growth on the investments in the SIPP each year. Over those 18 years, this would see the pension grow to around £95,000.
Assuming the investments continue to grow at 4% a year, that pot would be worth over £620,000 by the time your child or grandchild reaches age 65, even if they make no more payments into it.
When adjusted for inflation, this £600,000 pot would have roughly the same spending power as £200,000 today, a useful sum that could help support them in later life.
The sooner you start a pension for your child, the longer time frame you’ll have to capitalise on those compound returns.
Reducing the pressure on their retirement saving
Crucially, by opening a pension on your child’s behalf, you can be sure that they’ll have money saved away for their retirement when they’re older.
This is particularly important in the context of how young people currently view pension saving.
According to the Independent, a report by the House of Commons Public Accounts Committee found that high costs of living are seeing younger savers dismiss pension saving as an expense they cannot afford.
Similarly, research by consultancy firm LCP found that it’s become increasingly difficult for young people to build a decent retirement pot.
Their research found a 33% decline in the prospective size of pension pots for workers from 2007 and 2017, even if they had the same salary and made the same level of pension contributions.
They concluded that young savers would have to work for an extra 10 years to achieve the same levels as the previous generation.
By opening and investing in a pension for your children or grandchildren, you can help to alleviate some of this pressure, giving them the chance to enjoy their retirement in the same way that previous generations have been able to.
Work with us
If you’d like to find out more about how a pension could help your children or grandchildren, please speak to us at Cordiner Wealth.
If you’d like to find out more, email email@example.com or call 0113 262 1242 to speak to us.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.