11 to 15 September is Pensions Awareness Week in the UK.
For the last 10 years, a range of organisations including the Department for Work and Pensions, leading pension providers, and consumer groups have come together for a week each year to help promote the benefits of saving for a pension.
As a result, Pension Awareness Week (1) has helped improve the financial lives of millions of people.
While such an awareness campaign is aimed primarily at your own pension arrangements, it can also act as a useful prompt to consider setting up a pension for your children.
Discover four important reasons why starting to save into a pension for your children now could be a great way to start to help secure their financial future.
1. Pension contributions are a highly tax-efficient way to save money
To encourage you to save into a pension, the government provide valuable tax incentives that you can benefit from.
These incentives are also available to your children, even when they aren’t yet paying any tax.
All pension contributions benefit from basic-rate tax relief, which means that for every £80 you pay into a pension fund, a further £20 is automatically added. This is effectively “free” money, and means you’ll see an immediate 25% increase in the value of the fund, without you having to do anything.
You can pay a maximum of £2,880 a year into a pension for each of your children, which becomes £3,600 through the addition of 20% tax relief. That’s a £720 bonus each year.
As a parent or legal guardian, you can open an account on your child’s behalf. Once a child’s pension is set up, anyone can contribute. As a result, it could be a good way for grandparents to contribute to their grandchildren’s financial future.
2. You will reap the benefits of compounding
The famous scientist, Albert Einstein, is alleged to have described the concept of compounding interest as both the “eighth wonder of the world” and “the most powerful force in the universe”.
While there may have been an element of hyperbole in his assertions, he did have a point.
Compound interest is interest added to your original contributions. From then on, the interest starts earning interest, so your investment has the potential to constantly benefit from growth on growth, as well as continuing regular contributions.
3. You could also benefit from long-term investment growth
One of the most commonly cited investment adages is that “it’s all about time in the market rather than timing the market”.
This effectively means that investing money in stock markets over an extended period can be shown to be more effective than simply relying on the interest you may see from a savings account.
This is because an extended investment time frame tends to provide you with time to ride out any short-term market volatility.
For example, a report from the Telegraph (2) revealed that a three-year-old child having £75 a month paid into a pension on their behalf, receiving basic-rate tax relief, would have a pot worth £22,000 by the time they’re 18, assuming averaging returns of 4% a year.
Then, even if no further contributions were paid into the fund, by the time your child reached age 60 the same pot would be worth £117,712, according to the Calculator Site (3), and assuming the same 4% annual returns.
In both examples, the figures do not take into account deductions for charges and other costs.
4. Accrued pension savings could help your children to prioritise other financial commitments in adulthood
On the face of it, paying into a fund that your children won’t be able to access until they are at least 57 years old may not appear to be a sensible financial decision for you to make.
But aside from accessibility, there are some key benefits for you to consider when making such a long-term financial commitment.
During their lifetime, your children are likely to face a series of financial challenges. For example, they may want to repay their student loan or find the money to put towards a deposit for their first home.
Then there are the costs related to bringing up a family of their own. Indeed, the Child Poverty Action Group (4) confirms the cost of raising a child today exceeds £150,000.
Ultimately, having accrued pension savings already in place when they are still relatively young could give them one less thing to have to worry about and may help free up cash to save for other priorities in life.
They will also get valuable peace of mind from knowing they have a decent pension foundation in place that they can build on throughout their working life.
Furthermore, the fund you have saved for them will, potentially, continue to benefit from compounding and long-term investment growth.
There are a range of alternative savings options
Clearly, putting money into a pension for your children means you’re tying up money that they won’t be able to access for a considerable period of time.
As a result, you may want to consider an alternative way to save for your children’s financial future.
The savings options you eventually choose may depend on issues such as:
- The amount you’re looking to save for them
- Any specific use you’re looking to earmark the savings for
- When you want them to be able to access the money.
For example, if you’re looking to set money aside for your children that they can access as and when they need it, a simple savings account may well be the best option.
Alternatively, to build a fund that they can access, and have full control over, when they reach 18, you might want to consider a Junior ISA (JISA).
You can contribute up to £9,000 in the 2023/24 tax year into a JISA. The main advantage of this option is that you don’t need to pay Income Tax on any interest or dividends you receive, and any profits are free of Capital Gains Tax.
To find out more about alternative ways to save for your offspring, read 7 valuable ways to plan for your children’s financial future on our website.
Get in touch
If you’d like to talk to us about financial planning options for your children or grandchildren, please get in touch. Email info@aspirafp.co.uk or call us on 0800 048 0150.
Please note
The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation to any investment or retirement strategy.
The figures and information in this article are based on current tax legislation (as of July 2023) and may be subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
You should seek independent financial advice before embarking on any course of action.
(1) https://pensionawarenessday.com/
(2) https://www.telegraph.co.uk/pensions-retirement/financial-planning/child…
(3) https://www.thecalculatorsite.com/compound?a=22000&p=4&pp=yearly&y=42&m=…
(4) https://cpag.org.uk/policy-and-campaigns/report/cost-child-2022
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