Pension funds and children – Pensionfinder
With the end of the child trust fund (CTF), the latest financial innovation has arrived on the scene. Now you can start up a pension fund for your children, though they will not be able to touch it until they are 55. Although children will naturally consider this as a useless gesture in the present, it has been shown that by investing as little as £88 a month for your child in a Self Invested Pension Plan (SIPP), you could make your child a millionaire by the time they are 65.
SIPPs are pensions that offer flexibility, enabling you to choose what you will invest in, but pension companies are now looking towards children as their target SIPP market. One of these companies, Alliance Trust Savings, says that they have seen an increase in the number of parents investing in SIPPs. They believe that although it seems like a strange measure, the flexibility of SIPPs coupled with government tax relief is a prudent way of ensuring that your child is financially secure before they retire.
The government adds £20 to every £80 you put into the fund with extra payments potentially qualifying you for tax relief. In terms of tax and contribution limits, SIPPs are the same as regular personal pensions but they offer far more in the way of investment choice with funds, shares and bonds all open for customers. With the addition of basic tax relief, £2,880 entered annually into the SIPP becomes £3,600. This money will then be allowed to grow unhindered with no income tax or capital gains tax. As the tax relief is based on your child’s status, you are free to contribute what you like to your own pension plans.
Investment firm Hargreaves Lansdown stated that this fund was preferable to trust funds because the money was secure until they reached retirement age. This is in contrast to trust funds which saw 18 year olds waste the money on frivolous activities as soon as they received it. A pensions analyst at Lansdown, Laith Khalaf, says that more parents should take advantage of SIPPs because of the loss of the CTF. He also states that the obvious tax advantages place it far ahead of anything else on the market. As you have to be 16 to open a cash ISA and 18 for a stocks one, parents can help their children by placing their allowance to save for them.
Alliance Trust Savings were the company who stated that £88 a month from childbirth would be enough to ensure your child had a pension fund of over £1 million. This figure is reached because tax relief would add 20% which transforms your investment into £110 a month. It needs to be noted however, that these payments would have to be continuous until your child reaches 65. With an annual growth rate of 6% (this is calculated by the Financial Services Authority who project a rate of 7% but subtract 1% for investment charges), the pension fund would reach a whopping £1,009,000. However, inflation has not been factored into the equation which would certainly reduce the value of the money. Alliance Trust Savings also assume that there will be no change to the basic tax relief as it stands.