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Invest in a pension for your child By Sam Barrett
Although most people don't turn their attention to their retirement savings until they start work, there is no minimum age at which you can start a pension. Additionally there are no restrictions on whose pension plan you pay into, so children "We do see a number of pensions being set up for children," says Lynn Webb, a spokesperson for Legal & General. "It's particularly popular with grandparents and parents who either want to make a single contribution or pay regularly." How much to pay in You can invest a pretty healthy amount for a child too. Regardless of whether someone is earning or not, it's possible to make a contribution of £3,600 into their pension each year. Over 18 years this means as much as £64,800 can be invested into a child's pension. And you don't need to pay in all this money yourself either. Even though the child probably won't be paying any tax, they can still benefit from tax relief on any contribution made into their pension. This means that for every £100 paid into a pension plan the Government will pay in an additional £28. Therefore to get the maximum £3,600 into their plan you would only need to pay in £2,808. Tax relief How you pay into a pension is flexible too. It's possible to pay in a one-off lump or set up a regular contribution, which could be as low as £20 (£15.60 before tax relief) a month. Additionally, as stakeholders are designed to be as flexible as possible, there are no restrictions on stopping or starting contributions. In addition to the tax relief on any contributions, the pension fund is free from income tax, which helps it to grow faster. There is also no capital gains tax to worry about, although - providing the rules remain the same - the child will pay income tax when they take their pension. You could also structure your contribution to suit your inheritance tax planning. While it takes seven years for most gifts to pass out of your estate for inheritance tax purposes, there are some exemptions. First, there is a £3,000 annual exemption, which could go to one person or to several people if they receive more than £250. So, for example, you could give a child a gift of £2,808 for their maximum pension contribution. Additionally you are free to give gifts worth up to £250 to as many people as you like. Alternatively, if you can make a regular contribution to a pension, whether monthly, annually, or any other frequency such as on birthdays and Christmas, and show that it comes out of your income rather than your capital, then it will be immediately outside your estate too. Pros and cons There are advantages and disadvantages of opening a pension for a child but perhaps the biggest bonus is that the child has started their pension planning so early. This means that the child will be able to divert his or her money to all the other financial trappings of adult life. The earliest they will be able to access their pension is 55. This means that your gift will have had a very long time to benefit from stockmarket growth. "If someone paid £2,808 into a pension for a baby, topped up to £3,600 with the tax relief, and it grew by 7% a year for the next 60 years it could be worth as much as £110,000," says Nick Arbin, senior consultant for IFA firm Pensions Partnership. "In today's terms, this could provide a pension of around £1,700 a year - almost half of the State pension." Even making a small regular contribution can build up to a significant retirement income. For instance, Arbin says that if you paid the minimum contribution - £15.60 - each month and the child kept up these payments until they were 60 the fund could be worth £120,000, which would provide a pension of around £1,800 a year in today's terms. But giving a child a pension's headstart can be a disadvantage too. While there's plenty of time for the money to grow, you, and the child, might not appreciate the fact that they can't access it until they're 55, especially when they're facing other financial pressures such as a mortgage deposit or student debt. Because of this, although pensions can be an attractive investment vehicle for a child, they shouldn't really be the only one. Case study - a one-off gift Charles and Mary have two grandchildren, Molly, who's four years old, and Ruby, who's six months old. They would like to give them some money for their future and like the idea of starting pensions for them. They pay £2,500 into each of their grandchildren's pensions, which the Government tops up to £3,200 with £700 of tax relief. Even without any further contributions from the girls these pensions could generate a significant income for each of them. Assuming growth of 7% a year, Legal & General calculates that by the time four year old Molly reaches 65, she will have a pension pot worth £22,300 in today's money, which will provide a monthly income of £70. With a few extra years' growth, Ruby's pension will be worth a little more - £25,500 - and give her an income of £80 a month. Case study - Child Benefit Paul and Sarah are expecting their first baby in a few months and would like to set aside the Child Benefit for his or her future. They are particularly interested in starting a pension with the money as the grandparents have already set up an investment plan for the child's future education costs. For the 2006/2007 tax year Child Benefit is £17.45 a week for the eldest child in a family. This would equate to an average monthly pension contribution of £75.62, which would be topped up with a further £21.17 a month in tax relief from the Government. According to Legal & General, and assuming investment growth of 7% a year and growth in Child Benefit of 2.5% a year, if they paid this from birth to age 16, it would generate a monthly income of £197 in today's money at age 55 or £359 if they waited until age 65.
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