Thinking of Pension Plan for Your Children

It might sound like an odd idea but children’s pension schemes are becoming an increasingly common way for parents, grandparents and other interested parties to give children the best possible leg up on road to effective retirement planning.

In effect, a children’s stakeholder pension is no different than anyone else’s pension. Anyone can choose to pay into the pension fund - provided, of course, that the parents are aware - and the pension fund is invested in exactly the same way.

How does a children’s pension scheme work?

You can pay in up to £3600 a year into a child’s personal pension (£2880 plus basic rate tax relief at 20%) and because it is free from income and capital gains taxes the fund will grow even faster (although taxes will be payable when the ‘child’ retires).

If you start a children’s pension plan when they are born, the fund will have had 16-18 years of contributions and potential growth by the time your child starts to pay into it themselves - giving them a substantial head start.

If you paid in the maximum amount each year, it would be like starting a pension scheme at 18 with a six-figure lump sum contribution.

So how does that affect the value of a pension scheme at the time of retirement?

Well, the longer you save for retirement, the better the returns from your pension fund are likely to be.

Even a children’s pension scheme on which contributions stopped at age 18 could be worth in excess of £1.3 million pounds by the time the child is 60 (based on 7% growth a year). When you compare that to a scheme started at 18, the figure is around half as much despite requiring 42 years of contributions.

How do you start a children’s pension scheme?

Speak to your financial adviser. When dealing with growth over such an extended period even the smallest differences in the rate of growth of the pension fund could have a dramatic affect on the value of the pension on retirement.

After you have chosen a pension plan, you can make one off or regular contributions - subject to the minimums required by the scheme.

The next step is simply to keep an eye on the progress of the pension fund and speak with your independent financial adviser regularly to ensure you’re getting the most from your money - and that your child is too.