Would you open a pension for your kids?

There are a number of established ways parents and other adults can put money towards a child’s future, including savings accounts, Premium Bonds and Junior ISAs. Opening a pension, though, is a much longer-term investment, and according to HMRC, it’s one that over 60,000 children already have.

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What are the advantages?

The main benefits are tax efficiency and a potentially significant return on investment.

Anyone can put up to £2,880 a year into a pension, whether they’re earning or not. Children also benefit from tax relief, currently a helpful 20%, adding a further £720 to the fund. According to the Telegraph, many pension providers offer a basic package for children, although to get the best offering, you may wish to shop around. If you need an independent financial advisor Chippenham has several who can offer advice.

As the pension will be a decades-long investment, history suggests that any short-term market fluctuations will have negligible effect and the ultimate returns will be considerable. It’s reassuring to many parents to know their children will have a comfortable nest egg in retirement.

This is also a great way to introduce a child to the idea of long-term savings. Financial education is a vital tool for children when they reach adulthood, and pensions can demonstrate concepts like compound interest and investment risk. Apps can give a visual overview of the pension so children can see investments rising and falling year on year.

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Are there any drawbacks?

The main drawback is that pension funds can’t be touched until late in life – and as the state pension age changes, you don’t know exactly when that will be. While inaccessibility might be appealing to parents who worry about their child reaching 18 and suddenly having access to a lump sum in savings, it also means the money can’t be used for something like university fees or a house deposit. If you want to talk to an independent financial advisor Chippenham has experts who can give advice on the best investment options for children.

In addition, we don’t know how pensions will be affected by future governments and legislation. Current tax relief and other advantages could be reduced or removed in years to come. Ultimately, a pension has long-term benefits, both monetary and in terms of empowering children to manage their own future finances.

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