Pensions for Children
The words Pensions and children are not usually synonymous with each other, but for parents and grandparents, setting up a pension for a child can be an excellent way to give them a financial boost.
While a pension for a child might not be the first thing that would spring to mind when considering helping them out financially, depending on your circumstances, they can be surprisingly beneficial:
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Concerned about the probability that the hard-earned savings you’ve put away for them will be frittered away once they reach adult hood? Having the money tied up in a pension means that, while control of the pension passes to them at 18, they won’t be able to access the funds until they reach 55 (scheduled to rise to 57 in 2028).
Tax Relief
You can pay up to £2,880 a year into a pension on behalf of a child and the Government will contribute another 20% in tax relief making this up to £3,600. For a non-tax payer that’s an extra £720 a year for free. In addition, if the child has relevant earnings, the amount of contribution and tax relief could be higher.
It’s important to remember, however, that when drawing down on the pension the income will be taxed at their marginal rate at the time.
Returns
Einstein called compounding the ‘eighth wonder of the world’ and, as the money will be put away for many years, the effect of compounding will have plenty of time to work its magic. According to figures from Unbiased, just £10 a month from age 0 to 18 can result in a pension pot of over £20,000 by age 65.
Inheritance Tax
If inheritance tax (IHT) is a concern for you, contributing £2,880 per annum to a child’s pension means you stay well within your annual gift allowance of £3,000. This creates a wonderful nest egg for the child’s future, while at the same time reducing the size of your taxable estate
I’m still not keen. What else?
Pensions can be an effective solution to gifting in the right circumstances. However, if you simply prefer to be able to watch the recipients enjoy your gift while you’re here, or you want to help specifically with life events such as going to university or buying a home, there are other options:
Junior ISA
A Junior Individual Savings Account (JISA) is a long-term, tax-free savings account specially designed for children. A parent or guardian needs to open the JISA but anyone can contribute within the child’s annual limit of £9,000 (2020/21). You choose between either a cash or a stocks and shares Junior ISA, which can be accessed by the child when they turn 18.
Bare Trust
Got more to invest? A bare trust could be set up, managed by trustees of your choosing. They will still be able to access this at age 18, but there are no limits on how much you can invest. However, the same rules apply to gifting when considering the effect on Inheritance Tax.
Savings accounts
While interest rates for adults are falling below inflation, your children or grandchildren can still earn up to 4% on their savings if you’re looking for something a little more straightforward. Find our latest recommendations here.
It’s also worth remembering that, if Inheritance Tax is a concern for you, it could be worth making use of the following exemptions:
· Each tax year you can give wedding or civil ceremony gifts of £2,500 for a grandchild or £5,000 for a child.
· Payments to help with the living costs of a child who is under 18 are exempt, so long as you are able to maintain your standard of living after having made the gifts.
· £250 per person each tax year as small gifts, as many times as you like (provided you have not used up any other gifting allowances for the person).
Whatever you decide you can afford to give and how, if you would like any further information, please do not hesitate to get in touch.
