The arrival of a baby is always a great cause of celebration for parents and it’s only natural that mum and dad will want to do everything in their power to look after the needs of their child. As well as providing for the physical and emotional needs of their newborn, parents often also start to give consideration to how they can provide for their child’s future financial needs.
Traditionally, this financial support has been accomplished through opening children’s savings accounts. In the UK, parents also have the option of opening a Child Trust Fund (CTF) which is a scheme that is backed by additional government funding and which offers tax-free returns and can include exposure to the stock market for potentially higher returns.
Such schemes can be very effective at delivering a pot of money that your child can then use to finance college or the deposit on their first house. However, another option which is open to parents in the UK (and may be available in some other jurisdictions) is to open a pension for their child.
Stakeholder Pensions:
The UK government introduced Stakeholder Pensions in 2001, as a means of tackling increased concerns over how people are going to provide for a comfortable retirement. Although most stakeholder pensions are opened by adults in full-time or part-time employment, they are available to everyone and that means that it is possible for parents to open a stakeholder pension in their child’s name and contribute towards it.
The trick to making pensions work is always to start as early as possible, so having a pension that starts from the child’s birth is about as good as it gets! However, it’s important to realise that the pension funds can’t be accessed by your child until they turn 55. Therefore, opening a children’s pension is usually best used in combination with building up a savings fund that they can access when they’re quite a bit younger!
Why is a pension a valid option:
According to www.babyandpregnancy.co.uk , if you were to make an initial lump sum payment of 600 pounds into the stakeholder pension and then used your monthly child benefit of about 75 pounds to fund it, this would result in a fund of 618,000 pounds by the time your child is 20. In turn, this can lead to an annuity yearly income of around 39,000 pounds.
Another financial website, www.myeggnest.com, highlights that the reason why children’s pensions have so much potential. They state that if you paid in an annual amount of 3,600 pounds between the age of 0 and 16, the fund would have a value of 1,230,000 by the time the child reaches the age of 60 (based on an average 7% growth rate). In comparison, if an adult contributed the same amount between the ages of 30 and 60, they would just end up with a fund of 298,000 pounds. The reason for this is that with the pension from birth, the scheme has 60 years for the fund’s value to continue to grow.
Pensions are very tax efficient financial instruments. You get tax relief on the regular contributions but the fund is also free from income tax.
Opening a children’s pension:
Pensions are regulated products. Therefore, you will need to arrange an appointment with a qualified financial advisor. They will discuss the options and risks with you and will be happy to answer any questions that you might have.
I’ve highlighted that stakeholder pensions can be opened for your child but it’s also possible to opt for other types of pensions such as personal pensions and Self Invested Personal Pensions (SIPPs). You’ll therefore need to decide which type of scheme appeals most. Stakeholder pensions are the most basic and have charges capped at 1.5% per year. Personal Pensions and SIPPs offer a wider range of investment options but charges aren’t capped and may appeal more to people who have a desire to more actively manage their portfolios.
Having selected the pension scheme, and provider, that you wish to go with, you will need to complete an application form and you will be asked to provide supporting documentation in order for the pension to be opened.
Summary:
Opening a pension for your child is something that may never have previously crossed your mind. However, it’s an interesting option with the potential to provide a superb future income for your son or daughter.
It is worth remembering, though, that your child will have to wait a long time before being able to access their money and, as such, will normally not be suited to being the sole means of financial contribution. For families, however, who can afford to pay into a pension for their child as well as funding a more traditional savings account, it may be an approach that your child will thank you for in future years. And it has the added benefit of meaning that they will have a fund that they can’t fritter away when in their twenties!
Sources:
http://www.babyandpregnancy.co.uk/ChildrensPensions. html
http://www.myeggnest.com/info/childrens-pension.aspx
http://www.iii.co.uk/articles/articledisplay.jsp?art icle_id=9941569§ion=Pensions