Saving for Your Children's Retirement: A Smart Financial Move

Strategic Insights -

Millions of pounds are spent on Christmas gifts each year, but some canny parents are putting money into a pension for their children instead. This strategy offers several tax benefits and the potential for significant growth over the long term. Financiers argue that putting away a substantial amount of money early in life allows it to grow for decades, providing a comfortable pension for children when they start working.

Key Takeaways:

  • Parents and grandparents can shelter up to £3,600 per child per year into stakeholder pensions or self-invested personal pensions (Sipps).
  • Given the basic income tax allowance, the effective cost of this contribution is reduced to £2,808.
  • Gifted pension contributions may be exempt from Inheritance Tax (IHT) or qualify for exemption under "normal expenditure" rules.
  • Stakeholder pensions offer a more restricted investment choice than Sipps but have capped charges at 1.5% per year for the first 10 years and falling to 1% annually thereafter.
  • Sipps have no penalties for switching providers or stopping contributions, but charges can vary.
  • Advisers recommend diversifying investments and taking more risks with children's money over the long term, expecting a greater return from equities.
  • Policyholders should switch to less volatile investments, such as cash or bonds, as they near retirement.

Statistics:

  • Up to £3,600 per child can be sheltered into stakeholder pensions or Sipps per year.
  • The effective cost of this contribution is reduced to £2,808 per year given the basic income tax allowance.
  • Charges on stakeholder pensions are capped at 1.5% per year for the first 10 years and falling to 1% annually thereafter.
  • The minimum investment in a stakeholder pension is £20.
  • The first £3,000 gifted an individual per tax year may be exempt from IHT.

Sources:

  • Steve Latto, pensions development manager at Alliance Trust.
  • Tom McPhail, pensions adviser with Hargreaves Lansdown.
  • Justin Modray, of Bestinvest, the financial advisory group.
  • Alliance Trust.
  • Hargreaves Lansdown.
  • Bestinvest.
  • Scottish Widows Stakeholder.
  • Merrill Lynch.
  • Newton.
  • Schroders.