Your guide to children’s pension

clutching at pennies

clutching at penniesAsk anyone if they’re confused and mistrustful of pensions, and they’ll say yes. That’s not surprising as most people overcomplicate the issue, but this simple guide helps set things straight!

A pension plan is simply a long term savings contract which is designed to provide you with an income when you retire.

The good news is that people are living longer, but the bad news is that your pension may need to provide you with income for 30 years or so.  Your retirement could be nearly as long as your working life!

It’s normal for most people to start their pension plans around age 30, and to retire around age 65. That gives them 35 years to build up their fund.

Everyone knows that the earlier you start planning for something, the easier it is. Just imagine how much easier it would be to save for your pension if you had 65 years to do it!

Best present ever

It may be too late for you – but you can do this for your children.  This could be the best thing that you ever do for them. They may not thank you in the short term but they’ll certainly do so in the long term.

As a parent, you can make sure that the first 20 years of their lives are secure, as well as the last 20 years – even if you’re not there.

Turn £40 per month into £0.5 million

Hard to believe? If you start a pension plan for your child when they are born for £40 per month, and they took over the payments themselves when they started work, the pension fund could be worth £491,000 when they are 65 (assuming a growth rate of 7%).

Considering that the average pension fund in the UK is less than £35,000 at retirement, that’s a serious pot of money for relatively little effort.

Good investment

In this example, it costs you £31,200 over 65 years to build up a fund of nearly £0.5 million.

How does that happen? The reason for this extraordinary growth potential is the effect of investing money over a long period of time (snowball effect).

Tax efficient

Pensions are very tax efficient. The government are keen for us to make pension payments, so they encourage us by giving us ‘tax relief’ on our payments.

In English this means that in the above example, if you pay £40 per month into a pension scheme, they top it up to £50 per month.

Temptation free

It may not feel like an advantage, but the money is locked up until the plan owner is age 55 – which removes the temptation to raid the fund.

Technical stuff

  • You can start payments to your child’s pension plan any time
  • You can pay in between £20 and £300 per month
  • Payments are flexible (you can increase, decrease or stop at any time)

Which pension?

You can’t go wrong with a Stakeholder Pension from one of the large insurance companies.

If you are considering substantial investment, you might want to get advice from an Independent Financial Adviser. Most IFAs won’t charge you a fee for an introductory meeting. Check out our guide on how to find the right IFA to suit your needs – and your budget.