The younger generation face great financial pressure as they get older, so giving their pension a boost now could be extremely helpful.
Did you know you can save into a pension for a child? Most people think saving for a child means putting money away into an instant access account or an ISA. Ok so their retirement is some way off in the distant future, but by saving money for it now, could mean they don’t need to try and save as much in later life. This will mean less financial pressure as they get older.
How do pensions for children work?
You can open a pension for a child from the day they are born until they reach the age of 18. Whilst anyone can contribute to the pension it has to be opened by a parent or guardian. Whoever opened the pension is responsible for it until the child is 18 and can make investment decisions on the child’s behalf.
On the child’s 18th birthday, the control will automatically be passed to the child. They can then decide if they want to make personal contributions, and what funds they want the pot to be invested in.
Is there a limit on how much you can pay into a child’s pension?
There is a generous tax relief associated with children’s pensions, there for there is a limit on the amount of payments into a child’s pension which will qualify for the relief. The current limit is £3,600 or 100% of the child’s relevant earnings (broadly, employment income, self-employment income, partnership income and income from furnished holiday lets) -whichever is the lower amount. Contributions paid on behalf of a child are paid net of basic rate tax, assuming the child is a non-earner the maximum amount payable would be £2,880, with the additional 20% (i.e. £720) tax relief from the government would make the final yearly contribution £3,600.
When can a child withdraw money from their pension?
The same rules apply to a child’s pension as they do with any other. The pension can not be accessed until they are 55 years old. Although it is worth noting that they minimum age is increasing to 57 in 2028, it could also be subject to future rises. This is an important factor to think about when thinking how you want your money to help your child in the future. If you want them to access the money at a younger age then you should consider putting it into a Junior ISA or a Trust.
How much could a child’s pension be worth?
If you contribute the full amount of £2880 into the child’s pension every year from when they are born until they turn 18. Potentially this could give them a pension of £750,000 by the time they reach 57.
What are the benefits of contributing to a pension for a child?
There is the obvious benefit of providing your child with a healthy start to retirement, contributing to a pension could provide them with tax benefits in the future.
If your child becomes a higher tax earner when they reach adulthood, then they can claim a higher rate relief on any pension contributions made by their parents, or any other contributors. This will need to be done through a self-assessment tax return.
Can I pass my own pension on to a child?
Pensions are now the cornerstone of retirement planning they can play a key part of estate and inheritance tax planning. If you are part of a defined contribution scheme and you die before the age of 75, you can pass it on to your child, or other beneficiary regardless of if you have made any withdrawals or not. This amount will be free from inheritance tax and income tax. If you pass away after 75, it can be passed on free from inheritance tax but they will need to pay income tax.