Most of us start saving into our first pension from the age of 22 when we are automatically enrolled in our workplace scheme after landing a job paying at least £10,000 a year. But if you are 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 is perhaps not an immediately obvious financial step to take. This is mainly because any savings amassed will be locked away for a long time as, under current pension rules, a child won’t be allowed to withdraw them until they are at least 57.
However, a child’s pension could add a couple of decades of saving power before they find their first job – even if you are only putting in a small amount each month.
What is a child’s pension and what are the rules?
A child’s pension is a pension set up by a parent or legal guardian for a child under the age of 18. Importantly, a children’s pension shares many similarities with adult pensions, including attracting pension tax relief and the rules surrounding how to eventually access these pension savings.
How much can I pay into a children’s pension?
You can pay a maximum of £2,880 a year into a child’s pension 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 has been opened, anyone can pay into it.
When can a child’s pension pot be accessed?
When a child turns 18, they will gain control of their child’s pension account. However, they will have to wait a lot longer to unlock its funds.
While most defined contribution pensions can currently be accessed from age 55, this is rising to 57 in 2028. There can be no guarantees that this won’t change again in the future.
How is cash withdrawn from a child pension?
The options for accessing money from a child pension are the same as with an adult pension. These include taking tax-free cash, entering pension drawdown, buying an annuity, or choosing a mixture of these options once your child is in their mid- to late-50s.
» MORE: Your choices when taking pension benefits
Types of children’s pension
Just as there are different kinds of pensions for adult savers, so there are for children too. You can set up a ready-made pension with your chosen provider, or choose from a wider range of investments with a Junior SIPP.
A self-invested personal pension, or SIPP, is a type of personal pension that allows greater control over retirement planning and a wide choice of investment options.
The same is true of a Junior SIPP, except that you, as the parent or legal guardian, will manage your child’s SIPP on their behalf until they turn 18.
You will usually have to 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 will cost.
Personal or stakeholder pension
With both a personal pension and a stakeholder pension, you choose a pension provider and invest in a portfolio made up of funds that are available from the provider. If your time or investment experience is limited, this kind of pension may be simpler than managing a Junior SIPP.
There will be fees to pay, but for stakeholder pensions the government has set an upper limit on the charges that can be applied.
Pros of a child’s pension
Giving your child a head start in saving for retirement is the obvious benefit of starting a child’s pension, but there are other advantages, such as:
Even if you only save a small amount regularly, over a long period of time your child’s pension can quickly start to build and will reap the benefits of compound interest – this is where interest is earned on the interest you have already been paid. As your child’s pension pot increases in value, so does its potential to benefit from compound interest.
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 – can provide a gentle introduction to the world of personal finance. A child’s pension might also invite discussion around long-term saving and help their understanding of potentially complicated concepts such as compound interest.
Cons of a child’s pension
In the same way there are benefits to starting a pension for your child, there are also reasons why a child pension might not be a good choice.
Does a child pension make financial sense?
It can be expensive to raise a child, so paying into a child’s pension may be an extra financial pressure you could do without.
Investing in a child pension shouldn’t be prioritised above clearing debts and paying bills. If you do want to contribute to a child’s pension alongside your other financial commitments, it doesn’t have to be a large amount – many providers allow small contributions on a monthly or ad hoc basis.
No guarantee of a good return
As with all investment products, there is an element of investment risk attached to a child’s pension. The sheer length of time that a child’s pension funds are invested provides a good opportunity for growth, but this is by no means guaranteed – there is even the chance the fund could end up worth less than the contributions put in.
It’s a long time to wait
A child pension doesn’t deliver a benefit for many years and there may be more immediate expenses to help your child financially, such as going to university, taking their first step onto the property ladder, or buying a car.
Potential to miss out on higher-rate tax relief
A child pension benefits from tax relief at the basic rate of 20%, the lowest rate available. But should a child grow up to be a higher-rate taxpayer, they could claim the more generous higher-rate tax relief on their pension contributions. Given the pension lifetime allowance limits the amount that can be saved into a pension before tax charges come into effect, it could be worth leaving this allowance untouched, in case your child can take advantage of higher-rate tax relief in the future.
Pension rules can change
The rules surrounding pensions can and do change. For instance, the lifetime allowance was cut from £1.25m to £1m in April 2016, but has since increased to £1,073,100.
There is also no guarantee that the pension withdrawal rules will be the same as they are now when it is time for your child to take their pension.
Other ways to save money for your child
There are other ways besides a child pension that offer a chance to build up savings for your child that they can access when they are old enough.
Junior ISAs offer a tax-free way to set money aside for your child. They are similar to adult ISAs in that funds can be placed in both cash and stocks and shares accounts, but the annual allowance is lower – you can currently save up to £9,000 in a Junior ISA each tax year.
Keep in mind that Junior ISAs effectively become an adult ISA as soon as your child turns 18, meaning they can then access their savings.
Child savings accounts
Children’s savings accounts take many forms and can meet a wide variety of savings needs. Easy-access, regular saving and fixed-rate children’s accounts are all available, and can benefit from compound interest too. If a child can see their account balance grow, it’s a great way of introducing them to saving from an early age.
Premium Bonds are a savings option with a twist. Instead of earning interest, Premium Bonds provide the chance to win cash prizes in a monthly draw – any winnings are paid tax-free.
Anyone over the age of 16 can purchase Premium Bonds for a child – the minimum you can pay is £25, which will buy 25 separate bonds. And as Premium Bonds are provided by the Treasury-backed National Savings & Investments (NS&I), they are also one of the safest places you could put your cash.
But with no guarantee of a return on your savings, questions are often raised as to whether your money would be better off elsewhere.
Can a pension be passed on to a child?
Whether your pension can be passed on to your child when you die depends on a number of factors. The type of pension, whether you have started withdrawing money, and the individual scheme rules, are all important.
If you are unsure what your specific situation could mean for your child, it is a good idea to seek advice from a financial adviser.
Your personal or workplace pensions
If you hold defined contribution pensions and die before you turn 75, these can be passed on to your children without them paying tax on the amount in the pot.
If you die after age 75, your children will still be able to inherit your pension(s) but will almost certainly have to pay tax. Make sure you have named your child as a ‘nominated beneficiary’ if you want them to benefit from your pension – ask your pension provider for a nomination form or check if you can fill out a form online.
Should you have a defined benefit scheme, the individual scheme rules will determine what can be paid to your dependants and beneficiaries.
Checking with your pension provider as to the exact rules is always key.
» MORE: Learn about beneficiaries
Your state pension
The state pension works differently from other pensions, 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.
Source: Getty Images
Stakeholder Pensions Explained
Stakeholder pensions are flexible pension schemes designed to provide a way for anyone to save for their retirement. All stakeholder pension schemes must have certain features, including low minimum contribution amounts and capped fees.
Personal pension: arranging your own retirement saving
A personal pension is a private pension that you can set up for yourself, outside any workplace scheme. Open a personal pension plan and your contributions could be boosted by tax relief too.
Pension Contributions and the Annual Allowance Explained
Pension contributions are the payments that you, your employer, and the government make into a pension, but there are caps and other considerations to bear in mind. So how much should you contribute to a pension and what does the pension annual allowance allow?