Some children still in short trousers are well on their way to building up a handsome retirement fund. Tens of thousands of parents are giving their children a helping hand by saving into a child’s pension for them. However, this won’t be the best option for everyone.
There are, of course, good reasons to consider starting a child’s pension. Most obviously, there is free money available from the taxman: everyone, including children of any age, may put up to £3,600 into a pension plan each year and receive basic-rate tax relief of 20%. This means the maximum investment costs parents only £2,880, with the pension provider then applying to HM Revenue & Customs for the tax relief.
What’s more, the investments that most people make via pension plans tend to deliver the best returns over long-term periods. Since children have many decades to go until retirement, there is plenty of time for compound interest to work its magic on even modest contributions.
Another argument in favour is that it may be many years before they can make their own contributions. Even once they’re earning, obstacles such as student debt repayments, the need to save for a deposit on a first house, or measly salaries at the beginning of their careers may get in the way.