Setting up a pension for your child or grandchild

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If you want to set up a pension for your child or grandchild, what’s involved? The rules let you pay in almost £3,000 a year to a child or grandchild’s pension. But how easy is it to do? Find out.

Setting up a pension for your child or grandchild

You can invest up to £2,880 a year into your child or grandchild’s pension, no matter how young they are. This works out at £240 a month. Your child or grandchild will get tax relief on the money that you pay in. They get this even though they are not taxpayers, and it won’t affect how much tax you pay.

The tax relief adds a maximum of £720 a year to your pension contributions. This means that you effectively pay up to £3,600 into the pension, including tax relief, each year.

SAVVY TIP: Tax relief is a top-up from the government that’s paid directly into the pension. You don’t have to fill in forms to claim it. You can find out more about tax relief in my article called Tax relief on pension contributions.

Once your child or grandchild is 18, they’ll be able to have control over where their pension money is invested.

SAVVY TIP: Your child or grandchild won’t be able to take any money out of their pension until they are at least 55 years old. This is set to increase to 57 in 2028, and could rise further in the future.

What type of pension should you choose?

You can’t set up a workplace pension for your child or grandchild. You can only set up a personal or stakeholder pension, or a SIPP. SIPP stands for self-invested personal pension. These days, a growing number of pension providers sell SIPPs rather than personal pensions, they give people more choice about where to invest their money.

SAVVY TIP: SIPPs used to come with high charges and tended to be for people with – frankly – quite a lot of money to invest. The charges have come down a lot and they can be as low as, or lower than, charges for ‘ordinary’ pensions.

Choosing a pension provider

There are lots of different pension providers out there and lots of platforms, so it can get quite confusing.

SAVVY TIP: A platform is essentially an online supermarket for investments, including SIPPs.

With many pension providers, the person who the pension is being set up for has to be at least 18. However, some investment companies and pension providers have pensions that parents or grandparents can take out. Some market ‘Junior SIPPs’ which are aimed at parents and grandparents who want to set up a pension for their child or grandchild. However some pension providers don’t let you take out a pension directly without getting advice from a financial adviser first.

The companies that market child SIPPs or junior SIPPs include (in alphabetical order):

If you want to set up a pension without talking to a financial adviser, I would recommend:

  • Checking the charges. Some pension providers and platforms have higher charges than others. You should aim to pay less than 1% in charges. If you choose to invest your money in a simple tracker fund, which tracks what a stock market index, such as the FTSE All Share does, you should pay less than this.
  • Finding out how easy it is to add more money. Some pension providers’ websites are very clunky. Choose one that makes the process of paying in more money or changing what you pay, as easy as possible. If the provider has an app, you should be able to see how it’s rated on iTunes or in the Google app store.
  • Seeing what others say. These days it’s very easy to find out what others think of a particular company by looking on websites like Trustpilot. You can also find out whether lots of people complain about it to the Financial Ombudsman Service. Check the complaints data page on the Financial Ombudsman Service website.

Pros and cons of setting up a pension for your child or grandchild

The main disadvantage of setting up a pension for your child or grandchild is that they can’t take any money out of their pension until they’re 55 at the earliest. They won’t be able to use the money towards a deposit, for university fees or for the cost of a wedding or civil partnership. ISAs are much more flexible because they can use the money for whatever they want.

You can open a Junior ISA for your child, but you can’t open an ordinary ISA for them. And that includes a Lifetime ISA (LISA) or a Help to Buy ISA. But you can give them money to pay into it. With a Lifetime ISA, your child can use the money towards the deposit for their first home or for their retirement.

The advantage is that you could give your child or grandchild a head start in retirement. Most women – and men – don’t have enough in their pension for their retirement. However, the fact that your child or grandchild couldn’t take money out of the pension until they’re at least 55 may outweigh the advantages.

Photo by Chevanon Photography from Pexels

Related articles:

Self invested personal pensions (SIPPs) — is the DIY approach the right one for your pension?

Lifetime ISA – how does it work and should you have one?

SIPP v SSAS pensions; if you have your own business, which pension is best?

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