Reading something on Facebook prompted this post, but it’s something that I had considered a bit ago and then forgot about. I think I thought it would stretch our finances a bit too much at this time, but I keep going back to the idea, so here we go.
Would you start a pension for your child?
I’ll be honest, pensions are not my forte. I pay into one through work and that’s all I know to be honest. I know that I pay a certain amount and my employer also pays some in? I could check it online and keep meaning to register to I can keep track, but it’s something that languishes on my to do list that I never get round to.
But, I was talking to a friend about the possibility of our children doing jobs that don’t actually exist yet. In fact, that’s more and more likely, given the day and age. I find that a slightly worrying concept as a parent, that they might do something that doesn’t exist at the moment. Of course, I worry about their future and what the world might look like by the time they are adults.
I was then checking my investments for dividend income and noticed that you could open a self invested pension for a child. From the moment they are born! I didn’t realise that you do that at all. So, I had a look in more detail.
Using the calculator on the HL website (whom I own my own s&s ISA with) and tweaking the numbers, look at what I could do for my children:
This is for Frugal Toddler. If I put in £1,000 a year into a pension for him each year until he was 18 and then left it alone, he would almost have £100k as a pension which he could access at 57 (assuming 5% growth).
And this is for Frugal Baby. As he’s younger than his brother, his pension pot would be even bigger – £116k which would be a good size pot. And this is putting in £1000 a year, which is nowhere near the maximum you can put in.
Now, both boys have a savings account that is added to each month with a small amount. But, this money is theirs legally at 18, to do with what they wish. With a Junior SIPP, they can’t access the money until they’re 57. It would be locked away until then.
I can’t decide what to do. Other people can also add to their SIPP, if they wanted, up to the maximum amount allowed each year. I suppose that is the same for their savings account. And of course, investment returns are not a given.
What would you do? Would you start a pension for your child? I’d love to hear from you in the comments!
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All of this is just my opinion of course… Your children shouldn’t be dependent on you when they are sixty. Use a normal savings account, or a jisa if you must, to save for times when they will need your help – university or a house deposit perhaps. Funding their pension is a step too far down the mollycoddling financial outpatient road for me. Let them invest in their own future once they have established a place for themselves in the workforce. If the world changes drastically over the next few decades, so will the social support structures and what is considered normal. Adults being handed a pension pot that was funded from their birth won’t have been the norm, so shouldn’t be necessary.
Gosh this one is an interesting minefield !!
Firstly are you sure HL is the best platform to be using in terms of platform fees? You can’t begin to realise how much a higher charge can eat into your return even if it’s just a few points higher – compound that over 50 odd years like on a pension and the difference can be substantial. So using the figures above you’d need to take of platform and fund charges from the assumed 5% growth – not sure if your figures are adjusted for inflation either?
Also consider given the pension freedoms recently introduced that it may be more beneficial to pay into your own pension (possibly reaping a 40% tax saving rather than 20% applicable to children) and then using the fund to pass down to your off-spring and thus outside of inheritance tax if under 75 etc.
But as per the above post I think I’d rather help my children with more immediate financial hurdles before I stepped in with a pension – for example investing now to help with university fees or a house purchase.
I worry about the same things too. Such a different work world they face. I’m in the US and we have different financial products, but I started a fund for eldest as a college graduation gift and every year for Christmas add to it. I think of it as a down payment for house fund.
I’m with Rich on this one. Pay into your own pension and help your kids via alternative spending means. You don’t know what the pension rules will be in 60 years time.
Maybe investigate your pension a little further? If its a basic workplace pension then currently you are paying in 3% and your employer 2%. That’s a decent start but not enough for your retirement. You will also be in the default fund if you haven’t registered online or checked it. Which is not necessarily a good choice.
To increase your pension you can increase contributions to your workplace pension or alternatively open a new personal pension or SIPP for yourself. I’ve done this for both Mr2p and myself.
You can then vary the amount you pay in. Currently you can access your SIPP/personal pension at 55, although this might be changing to state retirement age-10 years.
If you want to FIRE then pensions as well as investments are tools to consider and use.
I was a tad surprised at the statement made in the article about not understanding pensions too well, as you point out they can be used as a very effective tool in the FIRE armoury.
As a 40% tax payer the initial tax saving is in effect giving a 67% return as soon as you pop the money in … show me another investment that does that … then continues to compound from that great start!
Also to consider is that a pension is likely to be one of your biggest assets, worth more than your house, or even other investments such as ISAs, UTs etc … personally I’d want to be all over that and make sure I understood it inside out 😉
I’m not a 40% tax payer, but I shall look into mine asap 🙂
I definitely need to look into my pension further 🙂
It’s amazing how tax relief and time can turbo charge your investments. Currently, I do pay into some savings for the children, but I pay more into my own Isa and pension. That way, I can choose how to help them at whatever age they need the money most.
Thanks so much for joining in with #MondayMoney!