Should you start a pension for your child?

drawing of the hands holding an Easter egg refering to child pension

Tax

MoneyPlus Features Team

28th March 2013 at 6:35pm

For many, Easter is a time to get together with family.  But what about a gift for the children which lasts beyond Easter Monday?

 

Grandparents could play a major role in helping build up a nest egg for grandchildren. It could help support them through their student years, or give them a foothold on the property ladder.

Saving with a building society account or a Junior ISA could mean that your grandchild would have access to the money once they become 18. But you might be concerned about giving a large sum of money to someone without the life experience to know it’s not always about the here and now.

However, a pension is different. You could set up a savings pot for your grandchildren to benefit from in later life. The earliest they can have access would be age 55. Family or friends can pay in up to a total of £2,880 every year. And whatever you pay in, the government will add another 25% to it.

So what would this mean for your grandchild?

Let’s say you have been paying the maximum amount into their pension for 18 years. This will grow tax-free. Growth can be above or below inflation but assuming it grows at 3% above inflation every year, in today’s values, this will produce a fund of £260,000 at age 55.

A fund this size could buy an annual income of £6,500 for life, increasing at 3% each year to combat inflation. This is based on an annuity rate of 2.5%. This figure is an average of rates currently offered by other providers. Of course, the earlier you start saving, the more years the funds have to grow.

And what would this mean for you?

Over the 18 years, you would have contributed £51,840. With the added contribution from the Government, this would mean £64,800 paid into the pension in total.

Your payments into the pension will be regarded as gifts. As such, it’s possible that they may not be subject to inheritance tax (IHT).  For the person making the gift, it could mean that up to £20,736 could be saved in IHT.  That’s because there’s £51,840 less in the grandparent’s estate, which may not have IHT paid on it at 40%.

So, giving the gift of a pension to your grandchild could prove to be cuter than an Easter chick and sweeter than a chocolate egg in the long run.

Find out more on starting the pension for the youngest ones

If you are unsure about inheritance tax and your personal circumstances, you should speak to a financial adviser.

As with any investment the value of a fund can go up or down and may be worth less than what was paid in.  Returns are dependent on investment performance and are therefore not guaranteed

The value of tax relief can change and is dependent on a customer’s individual financial circumstances.

Tax rules and legislation can change and that any information given is based on our understanding of law and current HM Revenue & Customs practice.

 

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