Most of us expect to wait until we are working, and perhaps even have our feet on the housing ladder, before we start thinking about a pension.
But some people have been given a head start, after their parents or grandparents have started a pension for them.
Why save for your children’s retirement?
Most of us are naturally more concerned with our own retirement than that of the next generation or two. Even if we have managed to retire in comfort, its more common for grandparents to use ‘traditional’ savings options than a pension.
But every child is eligible for a pension from the day they are born. It is taken out in their name and anyone can contribute a maximum of £2,880. According to HMRC figures, around 60,000 under 18s have a pension plan.
There are actually some very good reasons to set up a pension for them; but, as you would expect, there are disadvantages too.
Access
Under current rules, money in a pension is tied up until the age of 55; this is slowly rising and in years to come will be set at 10-years below the State Pension Age.
This means your child or grandchild can’t blow their savings the moment they hit adulthood. And, whilst the parent or grandparent might miss out on seeing what they do with the money, at least you know it will carry on growing for them until they are old enough to make sensible use of it.
However, the restricted access isn’t always helpful. It means that your child or grandchild will not be able to use the accumulated funds to help meet the cost of university or their first home. Both potentially more pressing needs that retirement.
Tax-relief
One big advantage of a pension over, say, an ISA (Individual Savings Account) is the tax-relief on contributions your child will receive even though they don’t themselves pay tax. A pension taken out for a child can receive up to £2,880 year and qualify for 20% tax relief.
In practice, this means an extra £720 a year automatically claimed by the pension provider, making a total of £3,600. Some pension providers may allow you to contribute more, but with no further tax relief.
An added bonus for parents and grandparents, is that the £2,880 a year contribution is below the annual £3,000 gift allowance for inheritance tax and so would immediately fall outside the value of the donor’s estate.
Choosing the right option
The cost of further education is rising, as are house prices, and the State Pension Age is being pushed further and further back.
These changes mean younger people will need greater access to capital than previous generations.
Parents and grandparents wishing to help have access to a range of options; including both ISAs and pensions. As both can hold the same assets, the debate over which is right, and the answer may of course be a combination of the two, probably comes down to access versus tax-relief.
Taking the right decision now, which will only be proved correct in years to come, can be tricky. We are of course here to help and guide you. If you would like to talk through the options you have to help your children or grandchildren, please get in touch with us on 0207 808 4120.