Benefits & Considerations of Pensions for Children

Benefits & Considerations of Pensions for Children

Est. Reading Time: 6 minutes

Benefits & Considerations of Pensions for Children

By Liam Hunt – Managing Director of Prestfield Wealth Management & Dad of One.

Liam has 20 years of experience working for Retail and Private Banks in both an advisory and managerial capacity. In 2017 Liam co-founded Prestfield Wealth Management and he is responsible for the vision and growth of the Practice.

As parents, many of us have the desire to save for our children’s future, but we may also have concerns about giving them full access to the money at a young age. This is a common dilemma I’ve seen by parents over the years. We want to ensure that the money we put away for our children is not wasted, and that it can truly benefit them in the long run and not spent on their first trip to Ibiza!

One solution that often goes unnoticed is setting up a pension for your children. It may come as a surprise, but even newborns are eligible for a pension, just like working adults. Parents and guardians have the option to establish pensions for their little ones and make contributions on their behalf. What’s more, the money invested in the pension receives a tax boost from the government. For example, every £80 you contribute, the government adds £20 to the pot, allowing for a maximum annual contribution of £2,880, which would give a boost of £720 within the tax year. If you start making contributions from day one for 18 years, you would have contributed £51,840, with the government boosting it by just under £13,000 (£12,960).

So why consider a pension for someone so young? Apart from the government boost, there are several reasons why parents should consider a pension for their children. Firstly, it addresses the concern of giving the child control over the money. While the child will be able to take control of the pension at the age of 18, they cannot withdraw the funds until they reach 57. This ensures that the money remains intact for a considerable period of time, allowing for potential growth and preventing impulsive spending during the teenage years. The age at which you can access a private pension (defined contribution pension) is 57 and this is 11 years before the current proposed state pension age of 68 that many of our children will face, this gives them a head start on retirement or ability to use the money at a wiser age.

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Another advantage is the long-term investment potential. The contributions made along with the government top-up, can be invested over a significant time span. This opens up opportunities for capital growth and the potential to accumulate wealth over the long term. By thinking ahead and setting up a pension for your children, you could provide them with the possibility of retiring early or passing on generational wealth in a tax-efficient manner.

However, it is important to consider the downsides of using a pension for children. One key drawback is the restriction on accessing the funds until the age of 57. While this ensures the money is preserved for the future, it may limit flexibility in case of unforeseen circumstances or financial emergencies. Although anyone can make contributions to a child’s pension only a parent or guardian can open it, this is sometimes why we see less uptake compared to other easier to open products. Another thing to consider is at 18 the pension passes to your child who is now expected to make the decisions on what to do with the monies and how they could be invested.

In summary, pensions for children offer significant benefits for parents who wish to save for their children’s future while maintaining control over the funds. The tax boost from the government, along with the potential for long-term capital growth, provides a solid foundation for financial security. However, it is essential to weigh up the limitations, such as restricted access, financial emergencies, and market risks. 

For anyone who is considering a child’s pension I would suggest speaking to a financial adviser who can go through all the pro’s and cons as well as alternatives available.

 

Liam Hunt is the Managing Director of Prestfield Wealth Management & Dad of one.

For the purposes of this article his views are his own. The tax treatment of the products discussed are correct at the time of writing (July 2024) and it is recommended that you seek your own financial advice from a qualified Financial Adviser.

If you wish to view the St. James’s Place Partnership email disclaimer, please access the link below:

https://www.sjp.co.uk/site-services/site-disclaimer/sjpp-email-disclaimer

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