While your child may not yet be at school, did you know you can open a pension for them? Retirement will be decades away, but starting a pension now can create long-term financial security. For the 2021/22 tax year, you can pay up to £2,880 into a pension for someone that is not earning an income, including children. Your deposits will benefit from 20% pension tax relief. So, if you deposit the maximum amount, tax relief of £720 will boost the total to £3,600. Usually, pension contributions are invested. As a pension will not be accessible for decades, there’s huge potential for growth due to the benefit of compounding. Paying into a pension throughout childhood can provide an excellent foundation for retirement savings that they can add to once they start earning an income. Research from AJ Bell shows how pension contributions in childhood can add up. If you contribute the maximum into their pension from birth to the age of 18, the findings suggest they could have £1 million in their pension when they are 71, without having to make additional contributions when they’re an adult. Over the first 18 years, you’d have contributed £51,840 to reach this milestone. The calculations assume an annual real investment growth rate of 4.5% post charges. This rate of return cannot be guaranteed but the results demonstrate the power of compounding. There are things to keep in mind if you plan to open a pension on behalf of a child.
- - The money won’t be accessible until they reach pension age. As a result, it’s not a flexible option if they want to use the money for other things, like a deposit on a home.
- - Pension rules can change. At the moment, you can access your pension at 55, rising to 57 in 2028, and it’s expected to rise further. The tax benefits of pensions and other rules could change too.
Making your family part of your financial plan
When setting out your financial plan, your priorities are crucial. For families, ensuring their children and grandchildren will be secure is often important and we can help you build a financial plan that reflects this. It’s not just a nest egg that’s important either. We can help you take steps that could provide your family with security, from setting out an estate plan to taking out financial protection in case the unexpected happens.
