Pension saving
As a parent, you can set up a junior pension for your child and contribute up to £2,880 a year (for the current tax year). You can set this up for any child under 18.
This personal pension, such as a Self-Invested Personal Pension (SIPP) is topped up by £720 by the Government (based on basic-rate tax relief at 20pc).
Alice Shaw, wealth planner at Succession Wealth, said: “Once the pension is set up, other relatives, such a grandparent, great-grandparents and even friends can pay money into it, provided the combined annual contributions do not exceed £2,880 net (£3,600 gross) per child per year.”
As with all pensions, returns accumulate free from tax. However, your son or daughter would not be able to readily access the pot. The earliest retirement age is currently 55, but is set to rise to 57 from 2028, and could well go up again in the future.
If you made a regular payment of £2,880 a year from the time your child was born until they turn 18 into a junior pension, this could give a pot of more than £737,000 from a total contribution of £51,840.
This £737,000 figure is based on the Government adding tax relief of £720 per year (£12,960 in all). It also assumes a growth of 5pc until the age of 57, that the parents stop contributing at age 18 – and that the child makes no further additions.
Better still, when the child is old enough to make their own contributions to a pension, there’s the potential to add a further £168,450.
This is based on a 5pc personal contribution from age 30, plus matching employer’s contributions for someone earning £30,000 a year, over 27 years, until age 57.
Altogether, the total pension when they reach 57 is more than £905,000 (£905,573).
Now read: Ten things to do before retirement (or risk your pension falling short)
What happens if these savings are combined
Add together the £1,782,465 from the Jisa and the £905,573 from the pension, and you get to a whopping overall total of £2,688,038.
Ms Stone said: “It may seem like a crazy idea when they are just a baby, but having money invested for the longer term – and with the long-term effects of equity markets – could make a real difference. This would potentially mean your child wouldn’t need to save a penny themselves in order to enjoy a comfortable retirement.”
Even though we are in tough financial times right now, tax benefits on pension contributions means even gifting a smaller amount can make a big difference in the future.
