Saving into a pension for a grandchild or godchild.
Locking money away until your child is in their 50s may seem a strange idea when there are so many expenses for a child that may be more urgent. Driving lessons, university fees and buying a home are all financial hurdles that will come first.
The advantage of being a grandparent or godparent is that you are able to provide the things for a child that parents might not have the bandwidth for. For many families, having godparents or grandparents give their time is very valuable, but sometimes there is also an opportunity for those wider family members to provide financial support too. Whilst parents are covering the cost of every day family life, it can be difficult for them to find the time to plan ahead for a child’s long term financial future. It is often godparents and grandparents that have the capacity to think about the benefits of opening a pension plan for a child.
Investing a lump sum, or a small amount regularly into child pensions means the money has plenty of time to grow into something substantial by the time the child needs it. The combined effect of contributions, investment growth plus tax relief from the government means a child could have a decent nest-egg by the time they retire.
Whilst giving a child a pension may not feel like the most exciting gift when you give cash to them. But in years to come, they may look back and feel it is amongst the most valuable gifts they have ever received.
How do I open a pension for a child?
There are a few different options, but the most common is a Stakeholder Pension fund. A child’s pension can be opened from as little as £20, and you can pay in up to a maximum of £2,808 per annum net of income tax in a single tax year. Like an adult’s pension, it attracts tax relief which boosts the total paid into the fund in a year to £3,600 based on a contribution of £2,808.
The children’s Stakeholder Pension can be opened by anyone who is interested in the child’s future. Grandparents, godparents, aunts and uncles can open an account. As long as the legal guardian of the child is aware the payments are being made, anyone can contribute.
You can also open a Self Invested Personal Pension for a child, which is sometimes referred to as a SIPP. A parent or guardian has to open a SIPP, and they are ultimately responsible for deciding how the money in the SIPP is invested. At Furnley House we typically open an account for a child with parental authority and the investment is managed on a child’s behalf. Contributions to the pension fund can come from anyone. Control of the fund passes automatically to the child when they turn 18, at which point they can make any decisions themselves on where they want their pension contributions to be invested, with or without the help of a financial adviser. But, as with a stakeholder pension, the cash will stay invested until they reach the age where they are allowed to withdraw it from a pension, which is set at 55 now, rising to 57 in 2028.
Like many other tax incentivised savings plans, you have until the end of the tax year April 5th to use the current pension contribution annual allowance, but you don’t have to pay the full amount in. Most providers will let you contribute just £25 a month, and you can start and stop payments at any time, and put in lump sums if a child is given a larger sum of money for a special occasion like a birthday.
What are the alternatives to saving into a pension?
Juniors ISAs are an alternative way to save or invest for a child. A Junior ISA can provide more flexibility in terms of access to the money for other reasons other that retirement. From the age of 18, a child can withdraw the funds and spend it on what they wish. Money saved into a pension however can only be used at retirement.
Would you like to find out more?
If you would like to discuss more about investing for a child and the options available, please get in touch by calling 0116 269 6311 or email firstname.lastname@example.org. Our team of independent financial advisers are highly experienced at finding the best investment solutions for you and your family and can guide you through your the options and choices available to you.
Past performance is not a reliable indicator of future performance.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.