If you are looking to create some financial security for your children, grandchildren or even great grandchildren, but want some peace of mind that the capital is spent more wisely at a later date then why not consider investing in a personal pension on their behalf.
By putting just £240 a month (which equates to £300 a month gross contribution) into a pension for a new child in the family each year for 18 years, when that child reaches age 60, they could be a millionaire.
This is based on a 5.7% investment growth p.a. after all charges and no further contributions being made by the child when attaining age 18. The child can of course make further contributions when they start work to create an even bigger pension fund.
From the moment a child is born, they are eligible to receive contributions of up to £3,600 into a pension each year. Anyone is able to make the contribution on behalf of the child. Unlike other investment options, such as a junior ISA, a pension can provide basic level tax relief even for a child who is not working, making it an extremely attractive long term savings option. On an annual contribution of £3,600, £2,880 is paid by a family member and £720 is paid by the government into the pension in the form of tax relief.
The money is, of course, locked away until the child reaches at least age 55, which might not be considered a bad thing. Children born today are unlikely to enjoy the same level of retirement income funding that the current level of baby boomers are enjoying. They will need to be more self-providing as support from the state is likely to diminish and arrangements like final salary pension schemes continue to disappear.
The younger generation do not always understand the need to save for retirement, and many cannot afford to. It is not until someone approaches retirement and they are faced with a finite income until they die, that they wish they had saved more. Those in retirement are best placed to pass this wisdom on to the younger generation and opening a pension for them is a good way of ensuring their long term financial future.
If you plan to leave some of your estate to your children/grandchildren and have surplus income, this is an extremely tax efficient way of passing money to them, the contribution to the pension takes money out of your estate thus reducing any liability to Inheritance Tax (IHT).
If you would like further information on how you can save for your future generations, then please contact one of our consultants.