Pension saving is not likely to spring to mind when thinking about gifts for a child. However, it could be a good way to set a young person up for life, with the power of compound interest and a longer period of time making a marked difference.
Express.co.uk spoke to Samantha Gould, financial adviser and head of campaigns at NOW: Pensions, who detailed the advantages of a junior pension.
The financial adviser said she’s often asked about junior pensions, adding: “I have been very vocal about my daughter, who aged five, has had a pension since she was aged two.
“A pension might not be the obvious present idea for a child, but you could be setting your child up with lifelong security in their later years.”
Just like a normal pension, a junior self-invested personal pension (SIPP) is tax-efficient and works as a long-term investment.
It can be opened up by a parent or guardian from the day a child has a birth certificate.
The responsible adult then manages the pension, but as soon as the child turns 18, control will automatically pass to them.
There are, however, limits to bear in mind when it comes to pension saving for a child. Currently, the annual limit for a junior SIPP is £3,600.
However, it is compound interest, an aspect commonly referred to as the “eighth wonder of the world” – a phrase coined by Einstein – which is likely to help junior pensions best.
Ms Gould continued: “The magic of investing over the long term is compound interest; that is, interest on top of interest.
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“By investing in a pension on behalf of your child from a very young age, they would be saving over a 50-year or 60-year period which will make a big difference. Even if you save small amounts, over many decades it could grow to a substantial pot over time.”
Assuming a parent or guardian were to make the annual contribution of £3,600, by the time their child reaches age 22, they will have approximately £186,000 saved.
While contributions would work out as £107,500, the accrued interest works out as £78,800.
This assumes the full contributions with five percent annual interest and annual inflation at 2.5 percent.
With many people failing to save adequately for retirement, Ms Gould states starting pension saving for a child as early as possible could prove a failsafe method.
Ms Gould unpacked the top things Britons should consider before opening a junior SIPP.
Anyone can pay money in
Although the SIPP must be opened by a parent or guardian, other family members and grandparents can pay into your child’s pension.
They cannot access the money until age 55
Even then it is 25 percent tax-free cash. If they do want to take the money out early, this is known as an “unauthorised payment” and they will be subject to a penalty tax charge of up to 55 percent.
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20 percent tax relief is available on all contributions, as “free money” they receive in tax relief and the growth in the money invested as returns from shares, bonds or funds add to the pension pot.
Giving your child options later in life
Ms Gould said: “One of the main motivations for me when setting up my child’s SIPP was the thought that I was giving her options and security in her later life. If she needed money at age 55, she can access a 25 percent lump sum. If she is working to retirement age and wasn’t happy in her role, she could take early retirement and not work in a job where she wasn’t happy.”
Get your child involved in investing
Ms Gould added: “Financial behaviours and attitudes of children are said to be set between the aged of seven and nine, based on the learned behaviours of the members of their household. By getting your child involved in the ongoing management of their investments and introducing your child to the benefit of saving and investing for the long term.”
With investment, capital is at risk, and people could get back less than they originally put in.
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