How to Set Up a Child’s Pension
You might not have considered a child’s pension before, but with a £2,880 yearly allowance, it could give your child a savings head start and a better retirement. We explain how to open a child’s pension, the pros and cons, and if your child can access your pension pot if you die.
Most of us get our first pension when we’re automatically enrolled in our workplace scheme after landing a job paying more than £10,000 a year. But if you’re a parent thinking about potential ways to help your child financially in the future, you might want to add ‘child’s pension’ to your list.
The percentage of children with child pensions in the UK is small, and it’s perhaps not an immediately obvious financial step to take, because any savings amassed will have to wait at least five decades to be accessed. But if you’re in a position to consider it, a child’s pension could give your child a couple of decades of saving power before they even get their first job – even if you’re only putting in a small amount a month.
What is a child’s pension, and what are the rules?
A child’s pension is exactly as it sounds – a pension set up by a parent or legal guardian for a child under the age of 18, that they won’t be able to access until they’re in their 50s and thinking about their own retirement plans.
How much can be paid in?
You can pay in a maximum of £2,880 a year, and with government tax relief, this sum would be boosted to £3,600.
Can a relative or family friend start a pension for my child?
To open a child’s pension account, you have to be the child’s parent or guardian, but once it’s opened, anyone can pay into it.
When can a child’s pension pot be accessed?
When your child turns 18, they’ll gain control of their child’s pension account. However, they’ll have to wait until they’re at least 55 – and possibly even older, if the government changes pension rules in the future – to unlock its funds.
Types of child’s pension
Just as there are different kinds of pension for adult savers, so there are for children, too. You can set up a ready-made pension with your chosen provider, or choose your own investments with a SIPP.
Self-invested personal pension
A self-invested personal pension (SIPP) or Junior SIPP allows you to invest in a wide choice of different investments and funds for your child’s pension. You’ll typically pay an annual administration charge and possibly other investment charges – for example, a dealing fee when you buy and sell funds or shares – so make sure you know what these are likely to cost you. You’ll also need to play an active role in managing and monitoring your investments.
Personal or stakeholder pension
With this kind of pension, you choose your provider and invest in a portfolio made up of funds the pension company has selected. If your time or investment experience is limited, this kind of pension set-up may be simpler. As with all pensions, make sure you find out what you’re likely to be charged for, and what your annual charges will add up to. For stakeholder pensions, the government has set a limit on the charges that can be applied.
Pros of a child’s pension
Giving your child a head start on their retirement nest egg is the most obvious benefit of setting up a child’s pension, but here are two others to think about.
Even if you can only save a small amount on a regular basis, over a long period of time your child’s nest egg can start to build, and you’ll reap the benefits of compound interest – where you earn interest on your interest. As your child’s pension pot increases, so does its earning power.
A chance to educate
Talking to your child about their pension – what it is, what it’s for, and when they can use the funds – could be a good way to gently introduce them to the topic of personal finance. As well, a child’s pension might invite discussion around long-term saving, and help make abstract concepts such as compound interest more tangible.
Cons of a child’s pension
Although there are benefits to starting a pension for your child, we’d be remiss not to acknowledge there are also reasons why it might not be right for you.
Does it make financial sense?
It’s expensive enough just to raise a child, so adding to that cost by paying into something that’s five decades away from benefiting them might seem like an extra financial pressure. Plus, there’s no point in investing in the comfort of your child’s future self at the expense of your current financial situation. Make sure you prioritise clearing debts and paying bills, and if you still decide to contribute to a child’s pension alongside these other financial commitments, keep in mind that it doesn’t have to cost the earth – many providers allow very small monthly or ad hoc payments.
No guarantee of a good return
As with all investment products, there is an element of risk to a child’s pension, and there’s no way to guarantee that what your child gets out will reflect what’s been paid in over the years.
It’s a long time to wait
And there may be more immediate things you want to help your child out with – such as further or higher education, getting on the property ladder or behind the wheel, or even helping them to go backpacking round the world.
Other ways to save money for your child
Although the focus of this guide is child’s pensions, there are other products that offer a chance to put away savings for your child that they can access when they’re old enough.
Junior ISAs, like adult ISAs, can either be cash or stocks and shares accounts, and offer a tax-free way to set money aside for your child. You can currently save up to £9,000 in a Junior ISA each tax year. Keep in mind that Junior ISAs become standard ISAs as soon as your child turns 18, meaning your child will be able to get hold of all the money saved up from then on. Depending on their disposition (and interests), this might not be a problem at all – or it might be a hair-raising thought.
Child’s savings accounts
There are many types of child’s savings accounts, so you’re bound to find an account that meets your needs. Plus, when your child gets to the age of 7, they’re allowed to start making deposits and withdrawing money, as well as view their account balance to see their savings adding up – all good ways to get them thinking about personal finance early.
Premium Bonds are a savings product with a twist. Instead of accruing interest in the traditional sense, your bonds instead give you chances to win money in a monthly prize draw. Each bond costs £1 – minimum spend is £25 – the more bonds you have in the draw, the higher your chance of winning – and anything you do win, you can claim tax-free. Premium Bonds are provided by government agency NS&I (National Savings and Investments), which is backed by the Treasury, giving an added sense of security for your money.
Can I leave my pension to my child when I die?
Whether you can pass your pension on to your child when you die depends on a few factors, such as the kind of pension it is, whether you’ve already started using it, and if so, whether you chose an annuity or drawdown. If you’re unsure what your specific situation could mean for your child, it’s a good idea to seek advice from a financial adviser.
Your personal or workplace pensions
If you hold defined contribution pensions and you die before you turn 75, you’ll be able to leave them to your children without them having to pay tax on the amount in the pot. If you die after you’re 75, your children will still be able to inherit your pension(s), but will almost certainly have to pay tax. Make sure your pension provider knows you have named your child as a ‘nominated beneficiary’ for them to benefit from your investment.
On the other hand, if your workplace pensions are defined benefit schemes, the individual scheme rules will determine what will be paid to your dependants and beneficiaries.
Your state pension
A state pension is different to a workplace or personal pension, and your child won’t be able to inherit the right to your state pension when you die.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
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Hannah has been writing about money since 2013. Formerly a copywriter for Virgin Money, covering credit cards, mortgages, pensions, and more, she now writes on personal finance for NerdWallet UK. Read more