In recent years, many families in the UK are taking a proactive approach to securing their children's future by contributing to pensions for their under 18 children.
Over the last three years, the number of families contributing to pensions for under 18s has increased significantly, jumping 36% from 25,000 to 34,000 between 2018/19 and 2019/20, then another 12% to 38,000 in 2020/21.
38,000 families in the UK are already contributing, pouring £67.5m into their pension pots last year alone.
More families are taking advantage of attractive tax reliefs to start building wealth for their children. Starting early allows them to take full advantage of the power of compounding returns. Compounding, also known as snowball effect investing, is where you earn returns from your original investment as well as previous investment gains over time.
Compounding returns is an enormously powerful force in investment. The longer you can make use of it, the better. Getting 18 years of compounding before they reach adulthood will be a huge benefit to them.
Families who contribute just £240 per month net into a pension from their child’s birth could give them a pension pot of over £100,000 by the time they are 18. This assumes an annual growth of 5% and considers received tax relief. Without having to contribute a single pound more after the age of 18, 40 further years of compounding at 5% would give them more than £720,000 by the age of 58.
One of the best things a parent can do for their child is to start a pension for them as soon as possible, if they can afford it. They can have a large part of their retirement sorted by the time they turn 18.
Pension tax relief can provide far better returns than Junior ISAs for the same contributions for under 18s. Contributing £240 per month to a Junior ISA from birth with 5% annual growth results in a pot of just £81,000 by the age of 18 – £20,000 less than with a pension due to the tax relief that is on offer for pension contributions.
Pensions have the added benefit of not being accessible to the beneficiary until retirement, rather than at the age of 18 as with a Junior ISA. For parents who fear that their children might spend a sudden windfall unwisely at such a young age, pensions can provide added reassurance.
Contributing to a pension is an increasingly popular choice for grandparents who want to give money to their grandchildren when their Junior ISA allowance has already been filled by their parents.
By starting early, making use of compounding, and taking advantage of tax reliefs, families can set their children on a path to financial security from a young age. If you would like to get started and want to find out more, please get in touch with Chartered Financial Planner, Görkem Barron (gorkembarron@lfwm.co.uk) or Director, Andrew Tricker (andrewtricker@lfwm.co.uk)
