ISA vs Pension - Saving for children

BFJ

Hi

I am looking at long term investments for my children. I am currently looking at pensions vs isas.

After doing some research it seems that there it's not exactly clear cut which is better. For instance, pension gives tax relief when investing but tax will be paid on income when pension matures, whereas ISAs give no tax relief when investing but you do not pay tax when you draw on the money. There's also more flexibility with ISAs (e.g. no mandatory annuity purchase when you take the money).

I'm a higher rate tax payer so was erring towards the pension, as tax relief at entry will probably out weigh paying tax on exit (assuming latter is basic rate).

However, I'm not sure what impact charges may have over the term of investment. The cheapest Stakeholder Pension for Children I've found is with Scottish Widows and charges 0.8% per annum, whereas I could invest in a Stocks & Shares ISA with an annual charge of 0.27% (TER). This is 0.5% difference a year, which could have quite an impact on the investment over 40/50 years.

Has anyone been thinking about these options themselves? If so, what conclusions did you draw? How did you calculate effects of differences in charges etc?

Any advice warmly welcomed!

Thanks

P.S. I'm assuming each of these options would have the same underlying investement (i.e. FTSE All-Share Tracker). And I realise that if I go for ISA option it will probably have to be in my name, as difficult to find index tracking funds that will allow you to place in children's names (e.g. Fidelity example I used with annual charge of 0.27%).

Aegis

Bear in mind that if your kids are under 18, they can't have a stocks and shares ISA. On top of that, if you are looking to contribute to pensions in their name, it's their earnings that you can get tax relief on, not yours. As such, you can usually only use the £3,600 minimum basic rate tax relief for non-earners.

I'm personally of the opinion that saving for them early in life is likely to be more beneficial than supplying them with a pension. Helping them to start out by getting a house, getting a car, going through university, etc, will set them up to the point where they can plan their own retirement. It's also less dependent on legislation not changing for 40-50 years if that's a concern.

yelf

bearing in mind that 25% of the pension can be taken free of tax, you're still receiving 6% additional tax relief from the pension

dunstonh

The cheapest Stakeholder Pension for Children I've found is with Scottish Widows and charges 0.8% per annum, whereas I could invest in a Stocks & Shares ISA with an annual charge of 0.27% (TER). This is 0.5% difference a year, which could have quite an impact on the investment over 40/50 years.

Two things to that point

1 - you are not looking very hard as that AMC is not very low.
2 - the same investments in ISAs are available in pensions. So, you can get 0.1% AMC on ISA and pension if you wanted.

And I realise that if I go for ISA option it will probably have to be in my name, as difficult to find index tracking funds that will allow you to place in children's names (e.g. Fidelity example I used with annual charge of 0.27%).

Its not difficult to hold funds with a designation in the name of a child. You cant hold them within an ISA for obvious reasons but unwrapped with designation is fine.

jamesd

You don't need to buy an annuity when you take pension benefits. You can take 25% tax free lump sum and stay invested, taking income from the investments with income drawdown (unsecured pension then alternatively secured pension after age 75).

Your children can't get your tax relief in a pension but you can open a new pension in your name, one per child. Invest in those pensions and you'll get your own rate of tax relief. Tell the trustees of each scheme that you want one of the children to get all of the money if you die. When you're 55 you'll be able to take benefits, so you could do something like using the 25% lump sum for a property deposit for a place for them to live at university and the income, taxed at your tax rate, can be used to pay the mortgage, subsidise their expenses or make pension contributions into pensions in their own name. I'm assuming that you'll be 55 before the children go to university. You can't simply transfer the pension pot to them but some guaranteed money availability is a good thing when you're young. Watch out for the pension lifetime allowance test.

BFJ

dunstonh wrote: »

Two things to that point

1 - you are not looking very hard as that AMC is not very low.
2 - the same investments in ISAs are available in pensions. So, you can get 0.1% AMC on ISA and pension if you wanted.

This sounds good. I can't find a stakeholder pension with an AMC of 0.1% though. COuld you direct me to where I can find it?