While you may have dedicated considerable effort to accumulating a retirement fund for the next phase of your life, have you considered your children’s and grandchildren’s financial future?
One effective way to provide them with a solid financial foundation is to open a private pension on their behalf and make regular contributions.
By doing so, you’ll provide your loved one with a fund that has the potential for significant growth over the years, providing financial stability and maybe even helping them avoid a pension gap when they retire.
3 significant advantages of setting up a pension for your child or grandchild
As a parent or guardian, you can typically set up a pension for a child from birth and make contributions into it on their behalf. Once the child turns 18, the pension automatically transfers to them, though they won’t be able to access the funds until they reach the minimum retirement age.
There are several significant benefits to opening a pension for a child or grandchild. Here are three:
1.You could give your child or grandchild a head start on retirement
It can take decades to accumulate a retirement fund large enough to support a comfortable lifestyle after you stop working. As such, it’s worth starting to save for a child or grandchild as early as possible, giving them a head start on retirement savings.
Data from Standard Life shows just how beneficial it can be to start a pension early.
If you contribute £600 to a child’s pension each year from birth until they turn 18, by the time they reach the age of 22, they could build up a pot of £14,800.
If they then started earning a salary of £25,000 a year at age 22 and paid the minimum auto-enrolment contribution of 8% (5% from them, 3% from their employer), they could build up a fund of £209,000 by the age of 66.
This is a considerable amount of money, which could support your loved one’s desired lifestyle in the next phase of their life.
2. They’ll benefit from tax relief on contributions
As with your own pension contributions, when you contribute to a child’s pension fund, tax relief is automatically applied at the basic rate of 20%.
This essentially means that a £50 monthly contribution is “worth” £60. Contribute the tax-relievable maximum of £2,880 in any given tax year and this will be topped up to £3,600 in your loved one’s pension pot.
Better yet, this amount is below your HMRC annual gifting exemption, meaning the contribution could remain outside of your estate for Inheritance Tax purposes, depending on any other gifts you make in the same tax year.
3. You could impart some invaluable money lessons
Involving your child or grandchild in the pension-saving process could allow you to impart some invaluable money lessons.
For instance, by letting them know when you contribute, you could highlight the importance of paying their future self first. This will encourage them to make regular pension contributions when they start earning, and as soon as they’re paid, rather than at the end of the month. This ensures that their long-term financial goals take priority.
You could also use your contributions to teach your loved one about how investing works. You might discuss topics like risk versus reward and how taking on more risk typically means the chance of higher returns. Additionally, you can demonstrate the importance of compounding and how it allows their wealth to snowball over time, potentially building a considerable pot.
You may want to consider some alternative saving methods
As we’ve already seen, your child typically won’t be able to access their pension wealth until they retire, meaning their money is essentially “tied up”.
While this means they can’t spend it irresponsibly when young, it also means that they might not be able to afford other significant financial milestones in their life, like purchasing their first home or funding higher education.
As such, you might want to consider some alternatives that allow them to put their money to earlier use, such as a Junior ISA (JISA).
While they typically won’t be able to control their JISA until they turn 16, or access the funds until they’re 18, a JISA could help them accumulate wealth for significant purchases while teaching concepts of wealth management.
You could open either a Cash JISA – which works much like a regular savings account – or a Stocks and Shares JISA. The latter would allow you and your child to invest wealth, potentially delivering competitive returns, while offering valuable investment lessons.
Get in touch
We can help you decide if a pension is the right option for your child or grandchild so be sure to get in touch before you make any decisions.
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can offer you some much-needed support.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.