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Setting up a pension for your child and investing in their future could help in the longterm. We know that the financial challenges facing parents these days are difficult. The thought of saving money for your children down the line may not be option that you could consider.

However, the advice that we give is that the longer an investment has to grow, the greater the benefit to you especially year-on-year.

Types of investment available

There are a number of ways that parents and grandparents can put aside money for their children or grandchildren. A Junior ISA (JISA) is a popular option or alternatively you can set up a pension for your child. According to HMRC, more than 60,000 under 18s already have a pension plan in place.

What are the advantages?

The advantage of their money being in a pension is that it is tied-up until they are 55 years old. So your child won’t be able to spend this money on a holiday as soon as they turn 18. The downside however, is that the age you can access your private pension is constantly being pushed back – in 2028 you will have to be 57 years old. It is likely that this will increase further in the future as state pension age rises.

The other advantage of setting up a pension for your child is the generous tax relief on contributions your child will get even though they don’t earn an income. Every child is eligible for a pension from the day they are born and anyone (parents, grandparents, other relatives) can contribute to it – a maximum of £2,880 a year and get 20% tax relief. The additional bonus here for parents and grandparents is the £2,880 a year contribution is below the annual £3,000 gift allowance for inheritance tax and so would fall outside the value of the donor’s estate.

The third advantage is the potential returns. Given the long-term nature of a child’s pension investment they will benefit from compounding. This is when they reinvest the income they receive from their investments, increasing the amount of money working for them over the longer term.

If you have any questions regarding setting up a pension for your child and would like to discuss with us, please get in touch.

Please note: A pension is a long-term investment. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. 

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. Tax rates correct as of the 2020/2021 tax year.

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