Child pensions – one of the advantages is that you could save up to £2,880 tax efficiently

May 12, 2019

Enable’s IFA’s in Bishop’s Stortford appreciate that savings towards your child’s future retirement might not be the first thing you think of when considering the various saving options for saving for your child’s future. But any parent or legal guardian can set up a pension for a child and pay into it.

One of the advantages is that you could save up to £2,880 tax efficiently each tax year with the government automatically topping up any contribution by 25%. This means your contribution automatically becomes £3,600. Further contributions over £2,880 in any tax year are still allowed but you won’t receive any additional contribution from the government.

The growth in your child pension is like an ISA and is free of tax meaning that it can start to increase very quickly. But it has to be remembered like any investment, it can also go up as well as down. The other thing which could be an advantage is that the monies saved could only currently be accessed when the saved for a child reaches a far more sensible 55 years old. This might not work for your family if they are likely to need the money for other reasons before then.

The example is that assuming you invest the maximum over just 3 years of £8,640 (£10,800 including the government top up), and assuming a fairly hefty average growth rate of 8% over 50 years, your Child pension could be worth £582,000 in 50 years with 25% available to be taken as a tax-free lump sum. While this may seem high, data from Moneyfacts, the comparison website, showed the average pension fund grew by 10.7 per cent in 2017.

But Pensions have historically been treated as a political football. This creates uncertainty over future withdrawal rules. The minimum pension age was 50 before 6 April 2010 before rising 55 the current threshold. It’s due to be increasing again to 57 in 2028.

Another thing to be aware of is the lifetime allowance – the maximum amount that can be drawn from a pension without facing a tax charge. The current limit is £1,003,000 at present. It has been reduced from £1.5million to £1million and jumped to its current level in the past three years alone.
It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individually tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain.

Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.

https://www.moneyadviceservice.org.uk/en/articles/childrens-savings-options

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individually tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain.

Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.

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