MONEY HACKS

Should you start a pension for your children?

Lauren Morton | 06/12/2018

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If you’ve got young children, the chances are planning for their retirement is pretty low on your priority list. However, there are plenty of reasons why taking out a pension for your kids whilst they’re still in nappies might not be as daft as it sounds. Here, we look at some of the pros and cons of paying into a pension for your children.

The advantages

1) There’s no minimum age you can have a pension, so in theory you could take one out for your child from the day they’re born. You can pay in up to £2,880 a year on their behalf, and the best bit is that under current rules, tax relief boosts that sum to £3,600.

2) Children’s pensions have the same tax advantages as adult pensions. That means no tax is payable on income from investments or on any capital growth, as long as the annual and lifetime allowances aren’t breached. The lifetime allowance, which is the total amount you can save into your pension funds without being hit by extra tax charges when you withdraw money, is £1.03m.

3) As your children’s pension savings will be invested over several decades, they will have loads of time to benefit from the effects of compounding, or the ability for income to generate more income and gains to grow on gains. This could significantly boost the potential returns they end up with at retirement.

4) Knowing they’ve got some savings in place for when they’re older could help ease the financial pressure for your children when they’re in their twenties or thirties and might have priorities other than retirement planning, such as buying their first home, or getting married.

As Albert Einstein put it: "The most powerful force in the universe is compound interest”.

The downsides

1) Although paying into a pension for your children could give them a valuable financial head-start once they reach retirement age, it won’t be the right choice for everyone. It’s important you take care of your own financial future first, otherwise when your children grow up, they could end up having to support you in old age. You may only wish to consider a pension for your child if you’re confident you’ll have enough in your own pension to provide you with a comfortable retirement.

2) Remember that if you do decide to put money into a pension for your child, under current rules they won’t be able to make any withdrawals until they’re in their late fifties. At the moment, you can normally start taking from a defined contribution pension from the age of 55. This age is due to rise to 57 by 2028 and 58 by 2044, so you must be comfortable locking money up for the long-term. It’s also worth bearing in mind that rules usually change over time, so there’s no way of knowing now exactly at what age your child will eventually be able to get their hands on their pension.

3) Your children are likely to face plenty of financial pressures before they get to retirement. You might therefore decide to prioritise helping them save for university, or to get onto the property ladder, in which case a Junior ISA might be a better approach. This type of account generally allows your child to get their hands on their cash at the age of 18.

If you’re not sure whether setting up a pension for your child is the best option for your family, or whether your own pension is on track, seek professional financial advice.

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