Pensions for the kids

The state pension age is going up for younger people.  And of course people only focus on their pension arrangements sometime after 40.  Problem is by that time it is probably too late to arrange a great pension.  So today I am advising you to do what most parents aspire to – prevent our children making the same mistakes that we did.

Now of course they will find new mistakes to make, but let’s think about their pension.  Is there something we as parents can do to help our children 40, 50 or 60 years from now when they retire?

The answer is Yes.  We can set up a pension scheme for them and contribute to it.  And what’s even better the government will top up the pension with tax relief.

This sounds too good to be true, but it is quite above-board.  Both of my children have their own pension schemes and have done since primary school.

The tax relief works in the same way as with adult personal pensions or stakeholder pensions.  For every £80 you pay in the tax-man adds £20.  Thus the fund gets £100.  The 20% is the tax relief that HMRC adds – and the child does not have to have any income for this to happen.  It really is money for nothing.

Any age of child or student can have one of these pensions and they are easily set up with a financial adviser or online.  Both you and the child need to be UK resident, and you need to be its legal guardian (parent). The maximum contribution in a tax year is £2,880 from you.  The government would add £720 making a gross of £3,600.  You can contribute monthly or annually, and even £30 per month would give a healthy sum by the time your child passes 55.

Projections show that investing the maximum simply for your child’s first 18 years could leave it with a pension plan worth over £1.5 million. Of course if they continue once in work then the pot will be even bigger.

If Granny and Grandpa are looking for a way to save for the children they could pay the contributions, which could be a tidy Inheritance Tax saver for them.

And best of all in my view?  The kids can’t touch the money until their mid-fifties and have hopefully wised-up.