Should you start a pension for your child?
19th September 2019
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The cost of raising children has often been a pressure point for family finances. The low wage growth and ultra-low interest rates of recent years have made many budgets even tighter.

The Centre for Economic and Business Research recently quantified the cost of bringing up a child from birth to the age of 21 as almost a quarter of a million pounds.1 That’s more than the price of an average home. This compares with around £150,000 when the research started in 2003.

The financial challenges facing many parents will put the idea of building a nest egg for their children way down the priorities list. But if one’s aim is to help a young child save for a distant goal, then the earlier these savings are started the better.

The benefits of a long-term approach to investing are time-tested and the principle is very simple: the longer an investment has to grow, the greater the benefit will be from the year-on-year compound effect of reinvested returns.

There are several ways parents and grandparents can save for children. The Junior ISA (JISA) is perhaps the most popular. A JISA is an ideal way to provide money for a future house deposit or university fees. Less well-known is that children can also have a pension fund as soon as they are born – and setting one up can bring significant tax advantages. More than 10,000 children already have pension plans in place, according to HM Revenue & Customs.2

Even if your child is a non-taxpayer, they will still get basic-rate tax relief on contributions. That means a maximum of £2,880 a year is automatically grossed up to take account of tax at 20%, giving an annual investment of £3,600.

“Starting early, and saving regularly can have an extraordinary impact,” notes Rob Gardner, Investment Director at St. James’s Place.

“If you put £5 aside every day from the day the child is born until they reach the age of 10, this can grow into a £1 million pension pot by the time they retire." This assumes an average growth rate of 5% a year.*

“It’s all about compound interest, it is the key to growing wealth. Albert Einstein called compound interest the eighth wonder of the world and said; ‘Those who understand it, earn it, those who don’t, pay it.’ The secret is to start saving into a pension as early as possible, even with relatively small amounts, to take advantage of it.”

Just as with pensions for adults, pension pots for kids grow in a tax-advantaged environment. And in common with JISAs, anyone can pay into the pension on the child’s behalf – parents, grandparents, godparents, friends or other family members. (Bear in mind that only the child's parents or guardians can set them up initially.) 

Saving this way may also help mitigate an Inheritance Tax (IHT) liability as payments from grandparents, for example, may be covered by the annual £3,000 IHT gifting allowance, or the exemption for payments made out of income.

Read the full article here: https://www.sjpinsights.co.uk/article/should-you-start-a-pension-for-your-child/nickjones

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Mark Luckman

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