The short answer is ‘yes’. Based on current rules, a child can have a pension from birth and parents (or grandparents) can pay £2,880 a year into their pension and still benefit from tax-relief. 20 per cent tax relief is added, taking the total to £3,600 contributed into the pension each tax year.
A pension is a long-term savings vehicle in a tax-wrapper which benefits from the advantageous tax-treatment on contributions as mentioned above.
As with all long-term savings, invested into a range of funds which grow over time, your child’s money will benefit from compound interest which significantly builds up over the years invested.
To illustrate these effects; on a pension contribution of £300 per month (with £240 contributed by the child’s parents and £60 being added as tax-relief) would generate a fund of:
£273,000 – equal to £129,000 in today’s moneys terms if contributions were made over 30 years
£522,000 - equal to £192,000 in today’s moneys terms if contributions were made over 40 years
£951,000 – equal to £273,000 in today’s moneys terms assuming contributions were made over 50 years
This assumes an annual return of 5.5% with inflation of 2.5% per annum, making the real return rate 3% before charges.
Considerations
A major drawback of setting up a pension for a child is that they cannot be access these funds until age 55 under current rules. Your child may need funds earlier than this, to fund university or for a deposit on their first home for example – their pension funds will not be available to them for these purposes.
However, it may be that this inaccessibility is also what makes it appealing to you as a parent looking to safeguard their child’s future retirement. Particularly so if you have concerns that your child may fritter away money that you’ve put into a savings account (such as a Junior ISA) for them, which they can access on their 18th birthday and spend as they wish.
When your child comes to take benefits from their pension, under current rules, 25% of the pension can be taken as tax-free cash, with the remainder taxed as income at your child’s marginal income tax rate. However, there is no certainty what the legislative and taxation rules will be several decades into the future.
There are more complex tax considerations when which should be taken into account when deciding whether to start a pension for your child; such as the Lifetime Allowance, as well as possible Inheritance Tax implications. We would recommend that you take independent financial advice on these areas, to understand the possible benefits and drawbacks, as well as other products that may be suitable, before proceeding.
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Please contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196 to arrange an introductory meeting, at no cost to yourself.
About Martin-Redman Partners
We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.