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Pensions are a key lifetime planning tool to save and plan ahead for the future. But have you ever considered setting up pensions for your children?

The idea of initiating retirement savings during childhood might not immediately cross our minds. However, establishing a pension fund, even though the child’s retirement will be decades away, can pave the way for their financial stability in the years to come.

A growing pension fund is reassuring for both parents or guardians and children, allowing the latter to focus on their financial goals when starting their career and improve their chances of a comfortable retirement.

There are several key benefits to starting pensions for your children. In this article, we discuss how it can be a tax-efficient way to invest into a child’s future, the benefits of compound interest and how it works, the advantages a child will get from their pension and when it is possible to start a pensions for children.

Pensions not only offer a tax-efficient method of saving, but initiating pensions for children at the earliest opportunity allows even minor contributions to enjoy extended growth periods.

When can you start pensions for children?

It’s possible commence a pension for a child right after their birth! Numerous pension schemes permit parents or guardians to begin a pension account for their child and begin contributing on their behalf. Embarking on a pension early can yield substantial benefits, due to extended-term growth and compound interest.

It’s important to note that only a parent or legal guardian can start a child’s pension, but once it’s open, anyone is able to contribute. Comparable to an adult’s retirement fund, the government provides a 20% boost to contributions made towards the child’s savings, irrespective of their tax-paying status.

Furthermore, should the child transition into being a higher or additional-rate taxpayer later on, they have the opportunity to claim additional tax relief on their contributions through the self-assessment process. This type of tax relief offers an advantage that is unavailable through an ISA.

Any increase in value produced by the pension will not be susceptible to Income Tax or Capital Gains Tax. The parent or guardian will look after their child’s pension until the child turns 18, whereby the control passes over to them.

The bottom line is, the sooner your clients start paying into pensions for their children, the longer the money has to grow.

How much can be paid into a child’s pension?

There is the option to contribute up to £2,880 annually into a child’s pension, and this amount can be boosted to £3,600 with the addition of government tax relief. Investing into a child’s pension not only benefits the child, but could also potentially reduce clients’ Inheritance Tax by using the annual gifting allowance of £3,000 for IHT or the exemption applicable to payments sourced from home.

Although the yearly contribution cap for children is notably less compared to that for adults, the power of compounding ensures that even modest contributions can accumulate significantly over an extended period.

Benefits of pensions for children:

Compound interest

Compound interest is the interest gained from the original deposit and any interest previously earned, combined with the overall amount. This accumulated interest then continues to generate more overtime, resulting in rapid expansion of the pension fund. Even modest initial contributions made during the child’s early years can lead to significant growth due to compounding, ultimately fostering a larger pension fund as the child approaches retirement.

Less impact on Current Income

Initiating a child pension with gradual, modest contributions extends the commitment duration, and benefits clients’ immediate financial obligations. Integrating the pension fund into a budget, streamlines day-to-day financial management, unlike substantial later contributions that may disrupt cash flow.

A flexible approach to pension savings allows for increased deposits during prosperous periods and decreased ones during setbacks. Modest initial contributions foster a sense of achievement as the pension fund expands, fuelling sustained commitment, and therefore harmonising the child’s future with existing financial stability.

Other ways to save money for a child:

Junior ISAs

Junior ISAs are tax-efficient savings and investment accounts for children under 18 in the UK. Parents, guardians, and family can contribute up to a government-defined annual limit, with tax-free earnings and interest. They are similar to adult ISAs in that they allow funds to be allocated to both cash and stocks and shares accounts, but with a reduced yearly limit – the current maximum contribution for a Junior ISA is £9,000 per tax year. Also, it is key to note that Junior ISAs transition into adult ISAs once the child reaches 18, granting them access to their savings.

Premium Bonds

Premium Bonds offer a unique approach to savings – instead of accumulating interest, they off the opportunity to win tax-free cash prizes in a monthly drawing. These bonds, provided by the National Savings & Investments backed by the treasury, assure a secure investment option. You can buy Premium Bonds for a child, starting with a minimum of £25 for 25 separate bonds, and anyone over 16 is eligible. However, since there is no guaranteed return on your savings, there’s a common debate about whether there might be more favourable investment alternatives.

To conclude, we hope this article has demonstrated clearly how beneficial initiating a child pension can be for your client and their children.

If you would like any additional advice or support on this topic, please contact CTT Private Client.