Child's Pension

starbucks

Hi, looking for some general information / suggestions on pensions for kids.

What would be a sensible strategy / type for starting a pension for a child ? Would an ISA be better or both ?
Looking forward to some suggestions ?
Thank you

xylophone

http://www.moneywise.co.uk/pensions/managing-your-pension/start-pension-your-child

http://www.hl.co.uk/pensions/vantage-junior-sipp

A pension is fine but university, a house might come first?

I was a Trustee for a minor and a pension was started (which he subsequently took over) but the bulk of his savings was in cash/shares which could be accessed for these purposes.

Fruit_and_Nut_Case

Is the child a taxpayer? ISAs offer pathetic rates at the moment anyway but are especially pointless for non-taxpayers.

bowlhead99

Fruit_and_Nut_Case wrote: »

Is the child a taxpayer? ISAs offer pathetic rates at the moment anyway but are especially pointless for non-taxpayers.

I think this is misleading.

Firstly, by 'pathetic rates' I presume you mean cash ISAs, which presumably is not what someone is considering if they are thinking long long term like pensions. S&S ISAs, which is what you would be looking at for a term from childhood to retirement, or even early childhood to university or house purchase, do not have 'rates' as such but can hold the exact same equity and fixed interest products as pensions.

Secondly, if we are talking about 'pathetic rates' on *cash* ISAs for a non taxpayer this is presumably by comparison of competing adult products where the top savings choice is to get 3-5% in a current account vs 1.5%-2.5% in ISA depending on length of fix. But those current accounts offering the limited promotional rates are not available to children. By contrast, a child can have a JISA with halifax at 3% (or 4% if parent also has a small amount of ISA with halifax). 3% is base rate x 6, so is hardly 'pathetic'.

Thirdly, if a parent puts money into a child's JISA it effectively goes invisible to the tax man forever. Whereas if the parent's funds are deposited on behalf of the child without that JISA wrapper, investment income >£100pa is taxed as if it was the parents.

So, even if we were talking cash JISAs, it is misguided to say they are useless to a non taxpaying child.

If we are talking S&S JISAs, which IMHO we should be as a pension alternative, these have much greater flexibility than pensions and would be my choice. All life's challenges (university, first car, marriage, house deposit etc) come before the age at which one can access a pension. By contrast, if the child's money is building up in an ISA and they do not actually need it to overcome these challenges then they can throw it into a pension as a 30+-year-old, and take their (hopefully, subject to earnings) 40% tax relief on all of it at that point.

jamesd

The best suggestion I have for a pension for kids is do something else. Investments within an ISA instead of investments within a pension would be a choice that will deliver much more value to them via things like helping them to save money for decades via supporting a home purchase and reducing accommodation costs. If you're looking at more than the annual ISA limit then doing some pension as well would be more appropriate.

Pension providers like to talk up pension contributions for young children because it means that they will get a steady stream of profits for at least fifty years. It's a great deal for them. Not for the child or giver.

If you do want to consider pension investing for a young child, you might find these numbers useful. 55 years of compounded growth at 4.5%, about 0.6% below historic long term UK market performance, would grow the money to 11.25 times the amount put in after allowing for inflation, so 11.25 times in today's money. Each £1000 of pension pot could produce about £40 of income a year. Median pensioner income is around £18,000 and the flat rate state pension is about £7,500. So perhaps £11,500 short of median income. £11500 / 40 / 11.25 * 1000 = £25,500 to invest for the child in their earliest years to get them to that level. Of course the £3,600 gross a year limit for contributions with tax relief mean that this could take longer to actually pay in but it's useful to know. I use 55 because I'm looking at early retirement here. If you want to look at state pension age, ten years later, the 11.25 becomes 17.48 and the amount to invest to get the extra £11500 falls to £16,500.

An employer when they are working will have to pay into a pension with them unless they opt out. Even for a low earner that would add around £10,000 to the pension income available at state pension age. Combining that with the child money would take them quite close to the higher rate income tax level and that perhaps illustrates why it may seem excessive. But it could enable them to retire ten years before the state pension age on a good income level.

atush

Pensions are fine, but S&S or other equity investments ( I used investment trusts for mine) inside a Jisa or outside one are prefrable for the bulk of child savings. For all the reasons above.

raymondred

There is tax relief on a pension, including a child SIPP (so a basic rate or even non-tax payer gets 20% relief so a contribution of £3,600 gets £720 tax relief so only costs you £2,880.)

Does a child ISA (JISA) also get tax relief? If not then this could be something to consider. Maybe the £720 saved could go towards the annual ISA allowance (if you wanted both).

Maybe someone can confirm if the child ISAs do not get tax relief.

atush

No the ISa doesn't get tax relief. In the sense of contributions. but growth and income are tax free (apart from automatic tax on dividends).

What it gets, is compound growth over the long term, tax free, and is able to ber used (as mine are doing now) to put them thru university w/o costly loans (student loan rate is now over 6%). It give flexibility, should the child want to buy their own home before the age of 55 (or maybe 58+ byt the time todays infants reach that age).

Pensions are fine, start one if you like. But dont put all your/their savings into one, when they will need other things sooner from age `18-30.

jamesd

Child ISAs get the same tax relief as adult ISAs. In addition if someone other than mother or father gives the child money outside a pension or ISA the child has their own income tax personal allowance to use.

The pension is a relatively easy challenge compared to getting enough money to buy a home at a relatively young age. The home option also has the advantage that the giver might still be alive to see the difference they make to the child's life. That's much less likely if they use the pension route.

PeacefulWaters

While you can start a pension for a child I'd much rather set my child up with the best start in life to give themselves the opportunity to fund their own pension.

Think education. Think first car. Think contribution towards house deposit. You might even be around to see the child benefit from the support.

A pension? It won't be appreciated by the beneficiary.

kidmugsy

Taking a fifty or sixty year bet on (i) what the pension laws will be, and (ii) what tax rates will be, seems loopy to me. At least wait until employer subsidies are at hand.