News & Blog

Are children’s pensions as good as they seem?

17th January 2019

Pensions for children? Surely that’s taking planning ahead to a whole new level?

Nonetheless, if you can afford it, putting money aside in to a pension for your children or grandchildren can be a sensible option.

Under the current rules, you can put £2,880 a year into a children’s pension, on their behalf. Even though the child won’t be a taxpayer, 20% is added to the amount in tax relief, up to £3,600 per annum. If you think about it, that can result in quite a significant amount over the years, taking compound growth into consideration.

The idea of contributing to a pension may tie in well with your sense of responsibility towards the next generation. You may feel sorry for the youngsters of today with their university fees to pay back and a seemingly impossible property ladder to climb.

However, on the downside a children’s pension can be quite frustrating for the recipient. The money is tied up until their mid-fifties. This means that although the amount is steadily growing with no temptation to dip into it, it may not be much consolation for a twenty-five year old desperately trying to find the deposit for a house. Instead of making their financial future easier, you may have, in fact, impeded it.

There are other alternatives which will also give you the benefit of compound growth and help you to maximise tax relief, such as using you our own ISA allowances and then gifting the money later. These may have more direct impact if the money is to help pay for a wedding, repay a student loan or enable them to buy a house or start a business.

Pension contributions are often referred to as ‘free money’ because of that tax relief. In addition, 25% of the lump sum when the recipient comes to take their pension is tax free, but it is equally important to remember 75% of any withdrawals will be taxable. Another consideration is that children’s pensions have the lowest rate of tax relief but once in employment, your children may be higher rate taxpayers so would have benefited from higher rate tax relief.

One thing is for sure and that is that the rules around pensions and withdrawal rates are frequently changing. Given the extended timeframe involved, it’s likely that the regulations around accessing a pension pot will have altered considerably by the time a child of today reaches pension age. Their fund will have had time to grow handsomely, though. As with most things, it all comes down to a question of personal preference for you and your family.


Disclaimer: Information is correct as of the date of publication (shown at the top of this article).

Sources:

Children’s pensions: should you save for junior?

https://www.moneywise.co.uk/pensions/starting-your-pension/should-you-start-pension-your-kids

Reference – BL050 – Jan – 19

Call us and one of our team will be happy to help or arrange a call back
Meet Our Team

Speak to a practical and experienced financial advisor

Get in touch with a member of our team

Meet Our Team
Get in Touch

Find out more about our range of service.

For further details please contact us.

Get in Touch
Visit Us

We have locations in both London and the North East

Newcastle | Richmond | Northallerton | London

Visit Us

Regulatory Statement

Gale and Phillipson Investment Services Ltd, Gale and Phillipson Advisory Services Ltd, Gale and Phillipson General Financial Services Ltd are all authorised and regulated by the Financial Conduct Authority (Reference Numbers 431387, 142752, 195080) and trade under the name Gale and Phillipson. Gale and Phillipson (SE London) Ltd is authorised and regulated by the Financial Conduct Authority (Reference Number 195522) and trades as Indigo Financial Advisors. Registered in England and Wales numbers 05409822, 02232959, 03751076 and 04077157. Registered office: Gallowfields House, Fairfield Way, Richmond, DL10 4TB.

Google Analytics Alternative