Annie Shaw discovers how parents can take an active role in securing – in spectacular fashion – their children’s long-term financial future.
Children are dear little things – not just because they are sweet and lovable, but also because they cost their parents a fortune. Anyone with a baby knows how the costs of cots, nappies, prams and toys add up – and the bills only get worse as the child grows older, when parents need to fund everything from school shoes and ballet lessons to sports trips and, eventually, university fees.
Saving for a child’s eventual retirement more than half a century into the future is therefore likely to be the last thing on the mind of a parent or grandparent, but it actually makes more sense than you might think.
An early start
Figures from the insurance company Clerical Medical show that £300 put aside each month for a child by a parent or grandparent between birth and the age of 16 could provide a massive pension fund of around £1.2 million by the time the child retires at the age of 55, without the child ever having contributed a penny during their working life (assuming annual growth of 6 per cent). At current annuity rates, this would provide a retirement income for life of nearly £70,000 from the age of 55, or more than £80,000 from the age of 65 – in addition to any state pension.
So, how can this be? Pension reforms in 2001 introduced the stakeholder pension. This type of pension allows individuals under the age of 75 to make income-related pension savings flexibly and cheaply. The stakeholder regime also allows those with only a small income, or no income at all, to pay up to £3,600 a year into a scheme without reference to their earnings. This has opened the way for higher earners to make payments into a pension scheme on behalf of non-earning family members – such as non-employed spouses or children – who since the reforms can, for the first time, benefit from pension savings in their own right.
A further benefit of the reforms is that contributions are made net of tax, whether the account holder has taxable earnings or not. So, someone paying in the maximum £3,600 that is permitted without reference to earnings would actually hand over to the scheme just £2,880, with the extra £720 being paid in by the government.
This means that fully funding a stakeholder pension for a child with no taxable income would cost a parent or grandparent just £240 a month. Annual management charges are no more than 1.5 per cent of the fund for the first ten years and 1 per cent after that.
Anyone doubting the benefits of saving over the long term should examine how savings made from birth to age 16 and then left with no more payments until retirement compare with savings made in the direct run-up to retirement.
Bob Fraser, senior wealth adviser at wealth manager Towry Law, says, ‘Contributions made during the first 18 years of life could easily end up being worth more than equivalent contributions made during the 42 y...
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