A pension might not be the first idea that springs to mind when considering a Christmas gift for a child or grandchild. And although it seems odd to think about as a present, it has the potential to transform their future more than any toy, video game or even cash gift you might bestow. In this article, our financial planning team here at Vesta Wealth offers this short guide on setting up a child’s pension and how this might impact their financial prospects when they are older.
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The power of a child’s pension
Many parents and grandparents provide a cash gift to a child at Christmas.
Smaller amounts are often spent straight away, but anything which is saved is likely to depreciate over time due to inflation, which over the longer term can have a huge effect. Take a £1,000 gift made in January 2010 as an example. Over the past ten years, goods and services have risen in value by 36% – requiring the money to grow by at least 2.9% each year to hold its value. Yet most regular savings accounts have been well below this for some time now, with some of the best closer to 1%.
Whilst time may erode the power of a cash gift which remains uninvested, a pension plan which qualifies for tax relief and is suitably invested has the potential to grow into a considerable sum in the long term.
Under current rules, children have their own pension contribution allowance of £3,600 which is £2,880 after 20% tax relief.
Imagine that you fully used this allowance by paying £240 per month into a child’s pension, from when they were born until they reach age 18 and that their investments achieve a 5% average return each year. Based on these assumptions, by the child’s 64th birthday they could have built a pension pot of over £1 million.
How to save for a child’s/grandchild’s retirement
There is a range of options for setting aside money for a child’s future.
A popular choice is the JISA (Junior ISA), which can be especially useful to help them save for shorter term financial goals such as the cost of university or a house deposit. Under current rules, you can put up to £9,000 into your child’s JISA each year until they reach age 18. Your child could access the money before retirement if needed.
A child’s pension, however, locks your child’s money away until they reach age 55 (under current rules). This could help relieve some of the financial strain as they get older. After all, most young people face significant cost challenges when starting their careers, beginning a family and getting onto the property ladder. Giving them help with their retirement planning could make a big impact.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.