While playground adventures and bedtime stories may be your primary focus today, raising a child also involves thinking about their future financial wellbeing and passing on your wealth. This is where pensions for children come in. With these accounts, you can start building a nest egg for their retirement from a young age and enable them to benefit from the power of compound interest over the long term.
In this guide, we’ll look at how children’s pensions in the UK work and explore the benefits and drawbacks of these investment accounts. Whether your child is still young or already well into their school years, this guide will equip you with the knowledge to make more informed decisions in relation to investing for their future.
What is a child’s pension?
 A child’s pension is an investment account designed specifically for children. With this type of account, parents can help their children start saving for retirement at an early age.
In the UK, the most common type of child pension is the Junior SIPP (Self-Invested Personal Pension). This is a type of personal pension that is managed on behalf of a child by a parent or legal guardian until the child turns 18.
You can contribute up to £2,880 per year into a Junior SIPP for your child. Contributions come with 20% tax relief, meaning that if you were to contribute the full £2,880, it would be grossed up to £3,600.
The benefits of pensions for children
There are a number of benefits to contributing to a Junior SIPP on behalf of your child.
Perhaps the biggest benefit is that your child will be able to compound their gains over the long term. Compounding (generating gains on previous gains) is the key to building wealth. However unfortunately, people are often not able to take advantage of the power of compounding in the first 20 to 25 years of their lives because they are not investing their money. With a Junior SIPP, your children can start compounding their money at an early age. This could make a big difference to their retirement savings in the long run. For example, let’s say you invested £2,880 (£3,600 after tax relief) into a Junior SIPP every year for your child from birth to the age of 18. If this money were to grow at 5% per year, it could be worth well over £100,000 by the time the child turned 18. If this was then compounded until retirement age, it could be worth over a million pounds, even if there were no further contributions.
There are also major tax benefits to investing in a Junior SIPP. With this type of account, not only do you receive tax relief on the contributions, but your child’s investments can grow free of Capital Gains Tax (CGT) and Income Tax. On top of this, paying into a child’s pension can potentially reduce your Inheritance Tax (IHT) liabilities. Given the tax benefits, contributing to a Junior SIPP can be an excellent way to pass wealth onto the next generation tax-efficiently.
One other benefit worth mentioning is financial education for your children. By contributing to a pension for your child you can help them develop financial literacy and learn about financial responsibility from an early age.
The drawbacks of contributing to a children’s pension
While there are plenty of benefits to contributing to a Junior SIPP, there are also drawbacks and risks to consider.
One downside to these accounts is that money is locked away until retirement (currently age 57 but it’s likely to be higher in the future). This means that the money is not going to be available to help pay for large life events such as going to university, getting married, or buying a house.
Another factor to keep in mind is that pension rules can change over time, particularly if the government changes. So, there’s no guarantee that pensions will be as tax-efficient in the future as they are today.
Of course, you should only consider contributing to a Junior SIPP if you are financially secure yourself. If your own retirement portfolio is small, or you have a large amount of debt, there may be better financial planning options for you.
What are the alternatives to pensions for children?
If a child pension isn’t quite right for you, there are some alternatives to consider. These include:
- Junior ISAs – Today there are both Junior Cash ISAs and Junior Stocks and Shares ISAs. These accounts are available to children under the age of 18 and the annual allowance is £9,000. With these accounts, your child can take control of the account when they’re 16, but they cannot withdraw the money until they turn 18.
- Child savings accounts – Many banks today offer savings accounts for children. These can be a good way to teach your children about compound interest.
How Bowmore can help with pensions for children
Planning for retirement might seem like a distant concern for a child, but starting a pension early can be one of the greatest gifts you can give them. Thanks to the power of compounding, even small contributions today could grow into a significant amount of money by the time they reach retirement age.
At Bowmore, we have decades of experience helping families build long-term wealth and we can provide expert advice in relation to pensions for children. To learn more about how we can help you secure your family’s financial future, get in touch.
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
- The Financial Conduct Authority does not regulate Estate Planning or Inheritance Tax Planning.
- Bowmore Financial Planning Ltd is not regulated to provide tax advice.
- The value of your investments can go down as well as up, so you could get back less than you invested.
- The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.
- Past performance is not a guide to future performance.
- A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
