Most of us are worried about the State Pension. Given that it is currently worth just £8,767.20 a year, roughly a third of the average full-time salary, it’s an understandable concern. You don’t want to spend your final years living on that.
Don’t worry, be happy
Do you want your children to spend their lives worrying about it too? If not, there is one thing you can do, right now. Start saving on their behalf.
It is never too young to begin investing, both for yourself and anybody else. In fact, the earlier you start the better, as your money has so much longer to grow in value.
The figures are astonishing. If you contribute £100 per month towards a child’s pension from birth, and continue until they are 18, the money could be worth around £130,000 by the time they reach retirement, according to calculations from Hargreaves Lansdown. In total, you will have paid in just £21,600 from your own pocket, a fraction of its ultimate worth.
Contributions to a child or grandchild’s pension attract tax relief at 20%, worth £5,400 in the example above, plus years of growth on top.
Play fair with the girls
Both boys and girls can benefit – although you wouldn’t think that by looking at HMRC figures supplied following a freedom of information request by Hargreaves. In 2016–17, some 20,000 boys had money paid into a pension in their behalf, but just 13,000 girls.
The gender pension gap starts at birth. The older generation who are making these contributions need to wake up to the fact that women can no longer rely on men for pension provision.
Parents and grandparents can pay up to £2,880 every year into a pension on a child’s behalf, with 20% tax relief adding £720, lifting the annual total to a maximum £3,600. Don’t worry if you can’t afford anything like that amount, you can start from as little as £20 per month.
A host of investment platforms will let you set up a pension for children, including Hargreaves Lansdown, Interactive Investor, AJ Bell, and others.
Don’t forget the Junior ISA
Alternatively, you could set up a Junior Stocks and Shares ISA on their behalf. This year you can contribute a maximum of £4,368. Junior Cash ISAs from National Savings and TSB both pay 3.25%, much higher than the adult version, but I still believe that you should invest in stocks and shares.
Children have in-built protection against stock market volatility because they have years to recover any losses from any short-term volatility.
ISA contributions do not attract tax relief but unlike money in a pension you do not pay any income tax or capital gains tax on withdrawals. A combination of the two is therefore ideal, tax-wise, especially since the beneficiaries cannot touch their pension funds until age 55, whereas they can make Junior ISA withdrawals from age 18, to cover education costs or a property deposit.
You no doubt have plenty of other calls on your pocket, but don’t forget the kids. By investing on their behalf today, they won’t have to worry so much about the State Pension tomorrow.