Pension for a baby

JackRussell

Hi all

We're new parents (Aug 2015) and already have a Junior ISO for our little one after agreeing that we wanted to save regularly and keep it out of our reach, handing over complete responsibility when HE turns 18 - something we thought long and hard against vs a regular savings account.

One other thing that came up was setting up a pension. I understand that a pension can be setup at any age, and if we were to contribute £2880 a year, this is then topped up by the government to £3,600 as a tax-back incentive.

Is this still the case? Is it recommended? We should be able to invest £2880 every year and want to make the best financial security for our little on as possible.

Obviously we would continue with Junior ISAs and regular savings too, but thinking much more longer term.

Would appreciate any advice.

westy22

Yes, it is still the case and also, yes it is a good idea if you can afford it. Of course, it is very long term at probably 60 years or so but think of the compounding over that timescale :-)

It MAY be an even better idea after the Budget in March as there is a lot of speculation that a higher flat-rate tax incentive may be announced to benefit non-taxpayers and BR taxpayers. Only speculation though.

jamesd

Junior ISA should be first priority because that can fund a property deposit that will provide benefit for longer. Beyond that, yes pension contributions are of use and have the potential to mostly eliminate the need for him to pay into a pension himself.

Assuming the £300 a month of gross pension contributions and UK average stock market returns less 0.25% or so in charges, so 4.75%, paying in for 18 years will give a pot size of £102,119 after 18 years of paying in. In today's money terms. Assuming [STRIKE]state pension[/STRIKE] minimum pension taking age has risen to age 60 the pot size on the same assumptions could grow to £717,093 by age 60. Even just using the 4% rule for income that can be taken this would be enough for an income of £28,683 plus later the state pension on top.

[Deleted User]

Yeah we do this. Aviva stakeholder pension through Cavendish Online which given the current value seemed to be the cheapest option at the time. Downsides, being a minor there is no online access, just annual statements. As value increases will review...

Being a very long term investment it is only about a 1/5th of the total monthly savings with the rest going into 6% Halifax Regular Saver and Junior ISA invested in Vanguard LS 100/Newton Global Income [just how it worked out when sorting out schemes...]. With Newton Global Income being the star, should have bought much more of that, DOH

And a bed-rock of NS&I Childrens bonds.

Cheers

atush

As long s the Junior Isa is in S&S and not cash, then yes a pension for the child could be in order.

But I would prioritize the isa. Or would run alongside an investment trust savings plan that you control, as some 18 yr olds are better with money than others.

PeacefulWaters

I'd much rather set my child up with first car and house deposit - which I'd likely see them enjoy.

If you want them to have a good pension paying for a good private education might be a better use of prioritisation of funds in the long term.

Just a thought.

grey_gym_sock

jamesd wrote: »

Junior ISA should be first priority because that can fund a property deposit that will provide benefit for longer.

agreed. and then there are other things that would need access long before age 57+: first car. a bigger house deposit. perhaps capital to avoid going into (much) debt when a student (this is debatable, but little point debating it in this context, since student funding could work very differently in 18 years' time). perhaps money to start a business. or to travel the world. or any other number of possible reasons for wanting access before age 57+.

Beyond that, yes pension contributions are of use and have the potential to mostly eliminate the need for him to pay into a pension himself.

eliminating the need for contributions sounds like a bad idea, because then your son would be turning down matching employer contributions (a.k.a. "free money"). why contribute to a pension now, with only 25% uplift from the tax relief, when you'll later be able to at least double your money with matching employer contributions (+ tax relief at some unknown rate).

personally, i wouldn't consider a pension for a child, unless i had extremely large amounts of money to put away for the child. and even then i'd put no more than a small proportion into a pension.

quotememiserable

jamesd wrote: »

....the potential to mostly eliminate the need for him to pay into a pension himself.

Assuming the £300 a month of gross pension contributions and UK average stock market returns less 0.25% or so in charges, so 4.75%, paying in for 18 years will give a pot size of £102,119 after 18 years of paying in. In today's money terms. Assuming state pension age has risen to age 60 the pot size on the same assumptions could grow to £717,093 by age 60. Even just using the 4% rule for income that can be taken this would be enough for an income of £28,683 plus later the state pension on top.

It won't work like that because you're ignoring inflation.

JackRussell

Thanks everyone for your comments. Plenty of food for thought... Personally
- Car: I would be something I'd expect them to work hard to achieve, or cash in an ISA for.
- House: yes I guess we all expect nowadays to have to help out where possible.
- Student debt: a valuable lesson on the value of money & savings

PeacefulWaters wrote: »

If you want them to have a good pension paying for a good private education might be a better use of prioritisation of funds in the long term.

Horses for courses... however my partner who had a private education earns less than I do who jacked it in after GCSE's. A firm believer that its the individual with drive who will win, not what type of education they we're lucky enough to have received.

I'm not bothered "seeing" them enjoy it. Knowing they have something in the future is more than enough for me. The figures we're talking about would more than buy a car/house deposit, albeit at the age of 60+

grey_gym_sock wrote: »

eliminating the need for contributions sounds like a bad idea

I wouldn't expect it to be enough to eliminate the need to contribute, and thats assuming they work for a company and not themselves.

grey_gym_sock wrote: »

and even then i'd put no more than a small proportion into a pension.

I only plan on £2880 per year - after that there is no tax benefit. So any more would then go into bonds etc.

Landslide_Victory

All great advice on here as usual. Not a lot more to add.


The ISA would be my priority. A great start for your son at 18. After that a pension yes a good idea also - put in as much as you can.


What a fortunate child to have parents as forward thinking as yourselves.

jamesd

quotememiserable wrote: »

It won't work like that because you're ignoring inflation.

All numbers given were in today's money, with inflation already factored in. The long term average return for the UK stock market has been a bit over 5% plus inflation. Deduct quarter percent for charges drops that to 4.75% plus inflation.

You're partly right because there is no guarantee that the £3,600 will increase with inflation, so it could well be a fair bit less if that doesn't go up. It hasn't changed for a while so there's every chance that it will continue not to go up for a while longer.

Median wage today is around 28k and even allowing for that, add in the state pension and it'd be retirement on around median wage even with no contributions by him. Median pensioner household income is around £18k at the moment so that's a fair bit above what's normal today for pensioners.

Exact numbers aside, it'll clearly set him up so even if he was to do nothing but leave the money invested, he'd be fine in retirement. Adding more via work and he'd be set up to retire about as early as the pension law allows when he gets there, and sooner still if he does some non-pension investing. Definitely not what I'd make my first priority but if the parents have the money it's giving their child a nice bit of long term security.