Paying into your child’s pension: a short guide

By July 14, 2020 No Comments

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

Is it worth committing capital towards a pension for a child and, if so, which type of pension should you choose and how much should you aim to save? These types of questions are very important for parents who are naturally concerned about their son/daughter’s future.

In this post, our financial advisers here at Elmfield (in Lancashire) offer this short guide to help parents articulate their thoughts in 2020. We hope you find this content useful. If you’d like to speak to an independent financial adviser about financial planning you can reach us via:

T: 01282 772938

Should I save into a child’s pension?

You might assume that as financial advisers we would simply answer “yes”, but the suitability of a child’s pension will vary depending on your financial circumstances and goals. First of all, how many children do you have and can you realistically commit money towards a pension for each of them? It’s also important to consider your beliefs. How much do you think your son/daughter should take responsibility for their own retirement savings?

There is also the matter of context and other goals. For example, do you wish to also help your child save towards a future house deposit, wedding and/or university? You might feel that these shorter-term goals take more precedence over helping your child save towards retirement, and putting money into a pension for them will restrict their access to it until they turn age 55 (under pension rules in 2020-21).

However, if you are in the position of having more disposable income and have already attained some of your shorter-term goals for your child’s future, then helping them start a pension can be a great way to give them a financial “leg-up” later. Here are some facts to consider:

  • People in the UK are living longer, which means that each person may need to save more or work a longer career to cover a longer retirement.
  • The UK population is getting older, meaning there are fewer young people paying the necessary taxes to support retired people. The state pension is under strain and there is no telling how much someone may be able to rely on it for a retirement income in 50-60 years’ time. This implies taking more responsibility for one’s own savings.
  • Starting retirement savings earlier allows for a longer period to generate compound interest, say, over six decades. This means greater potential for capital growth compared to starting in your 20s, 30s or 40s, and takes some of the pressure off of your child needing to save more towards retirement, later in the career.

Types of children’s pension

Unfortunately, there are more limited options in 2020-21 for a child compared to an adult who can start building their workplace pension and state pension once they enter the workforce. Yet there are some strong children’s pensions on offer to consider with your financial adviser.

A Junior SIPP (self-invested personal pension) is a good example. In 2020-21, this allows you to save up to £2,880 a year towards your child’s retirement, with 20% added tax relief on the contributions from the Government – i.e. effectively capping yearly contributions at £3,600. As mentioned above, anything committed to this account will not be accessible by anyone until your child reaches age 55. This may be concerning for some, but it can be a good safeguard against your child simply taking the money at 18 and spending it on something unwise.

The potential to generate a substantial sum for your child is quite considerable. Suppose, for example, that you put £240 into your child’s SIPP each month. With the tax relief on top, this would amount to £300. By their 18th birthday, you will have saved £54,000 towards their future retirement. Now let’s assume a 5% annual growth rate on this sum (after fees and charges) from your child turning 18 until they reach age 60. Even with no further contributions, the sum could grow to £330,000 by the end of this period. Admittedly, after inflation, this amount would not be worth £330,000 in today’s money – yet it would still represent a significant sum which could make a big difference towards your child’s retirement lifestyle.

Of course, there are pros and cons to consider with your financial adviser. For grandparents who want to help with future retirement costs, one sad reality is that you will not be around to see your grandchild benefit from your generosity. Setting this aside, however, it’s also important to consider the tax implications. In 2020-21, for instance, there is a £1,055,000 cap on the total amount someone can save into a pension (i.e. the Lifetime Allowance). By committing money to a child’s pension, you’ll need to be careful that your contributions do not inadvertently trigger a penalty such as this in the distant future.

Conclusion & invitation

If you are interested in starting a conversation about your financial plan or child’s distant retirement plans, then we’d love to hear from you. Get in touch to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

Reach us via:

T: 01282 772938