Are children’s pensions as good as they seem?
Pensions for children? Surely that’s taking planning ahead to a whole new level?
Nonetheless, if you can afford it, putting money aside in to a pension for your children or grandchildren can be a sensible option.
Under the current rules, you can put £2,880 a year into a personal pension or stakeholder pension, on their behalf. Even though the child won’t be a taxpayer, 20% is added to the amount in tax relief, up to £3,600 per annum. If you think about it, that can result in quite a significant amount over the years, taking compound growth into consideration.
The idea of contributing to a pension may tie in well with your sense of responsibility towards the next generation. You may feel sorry for the youngsters of today with their university fees to pay back and a seemingly impossible property ladder to climb.
However, on the downside a children’s pension can be quite frustrating for the recipient. The money is tied up until their mid-fifties. This means that although the amount is steadily growing with no temptation to dip into it, it may not be much consolation for a twenty-five-year-old desperately trying to find the deposit for a house. Instead of making their financial future easier, you may have, in fact, impeded it.
There are other alternatives which will also give you the benefit of compound growth and help you to maximise tax relief, such as using our own ISA allowances and then gifting the money later. These may have more direct impact if the money is to help pay for a wedding, repay a student loan or enable them to buy a house or start a business.
One thing is for sure, is that the rules around pensions and withdrawal rates are frequently changing. Given the extended timeframe involved, it’s likely that the regulations around accessing a pension pot will have altered considerably by the time a child of today reaches pension age. Their fund will have had time to grow handsomely, though. As with most things, it all comes down to a question of personal preference for you and your family.
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.