Pensions for Children

Current legislation allows an interesting investment opportunity for parents and grandparents - setting up a pension for children.

This may seem ridiculous to some but consider the facts:

• Many parents want to pass on wealth to their children in a tax efficient manner but have already used the limited tax planning opportunities available.
• The State continues to appraise the value of state pensions annually with the value of state pensions linked to the ‘Triple-Lock’ which is the higher of 2.5%, consumer price index or average UK earnings. With growing demands on the public sector and concerns over reducing government debt, it is not inconceivable that state pensions will be means tested in the future.
• Parents want to pass on wealth to children without the liability of inheritance tax (IHT). Pension funds are currently held within a trust and do not form part of an individual’s estate for IHT purposes. However, in the
• October 30th Budget, the Chancellor proposed changes to the IHT exemption on unused UK pension funds, which is currently the subject of a consultation period.
• Stakeholder Pensions is a tax efficient way to save on behalf of your child/grandchild. You can contribute up to £3,600 gross a year. With basic rate tax relief of 20% given at source, this means you pay only £2,808.

Consider the following scenario for two children:

The first child’s parents / grandparents contribute the full allowance of £3,600 (or £2,808 net of tax relief) to a Stakeholder Pension annually from birth to age 21. The second child is not so lucky and there is no contribution set up.

The following outlines the difference at retirement:

Child 1

At age 21, the fund value of the Stakeholder Pension could be £152,000 (based on an assumed annual growth rate of 6% net of fees). If no more payments were paid into the account and the fund grew until aged 60, the fund value could be £1,475,000. If the child were then to draw income of 5% from the capital accumulated, they would be able to draw a gross income of £73,750 pa.

Child 2

With no head start, this child has no pension fund at age 21. In order for him to get an equivalent pension to his sister at age 60 (a fund value of £1,475,000), this child would have to contribute £800 per month from age 21 to age 60.

Note: Fund values are based on annual contributions of £3,600, a 6% growth rate, and a 1 per cent annual management fee.

All in all, it’s a very worthwhile exercise for wealthy parents/grandparents to contribute to a Stakeholder on behalf of a child.

Please do contact us if you wish to discuss establishing pension investments for your children or grandchildren.