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Should I start a pension for my child?

Kit Klarenberg
Written By:
Kit Klarenberg

Should I start a pension for my child?

Starting a pension for a child barely out of nappies doesn’t sound like it should be a priority, but it can give them an important head start.

It is possible to start a pension for a child the moment is is born – and it can give them financial security and prosperity long after you have left it. According to recent HMRC figures, just over 60,000 children in the UK already have a pension in their name.

One of the best reasons to start a pension for your child is time. Quite simply, setting up an investment for your child at an early stage will offer the fund decades in which to develop and grow.

For instance, imagine that you set up a pension for your 15 year old, pay in the maximum annual allowance three years running to a fund offering average yearly returns of 4 per cent, and then leave the fund to its own devices. If your child cashed out that pension at the age of 65, your initial investment would have grown to approximately £80,000.

Starting a pension for your child is also an economical method of investment. Up to £3,600 can be contributed to a pension annually; however, due to tax relief, parents only contribute £2,880 a year – the rest is topped up by the taxman.

Where can I set up a pension for my child?

You can set up a ‘stakeholder’ pension for your child with many major pension providers. You can also use a broker such as Hargreaves Landsdown, or Bestinvest, who offer a larger range of investment options – and you can choose the investments yourself.

Are there any downsides?

In general, the major risk with any pension is political unpredictability – and child pensions are arguably more susceptible than their counterparts.

Political tinkering with the UK pension regime is a fact of life, and the form of that tinkering is difficult to predict. Future governments may be less wedded to the idea of tax relief to encourage pension saving, and may scrap some of the current entitlements. For instance, Ed Miliband has confirmed that a Labour government would make numerous changes to the pension system, including reducing the lifetime limit on tax-free pension savings and the sum that can be saved tax-free per year.

The age at which pensions can be unlocked is also subject to change. At present, you can legally access a pension from the age of 55 (unless you’re in extremely poor health). However, current government plans mean this age will rise in line with average life expectancies – meaning this age will be 57 in 2028. Future increases would further delay the point at which pensions can be accessed – as a result, you have no way of knowing when your child will be able to access their pension.

An alternative could be to invest in a Junior ISA, which offers far greater accessibility than a child pension. Please click here to read the Your Money guide.