Jul 17

Pensions for babies

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When investing for children, a pension may not be the first thing that springs to mind. However, if you’re a parent, grandparent or family member, it can be a fantastic way to invest for your new arrival. Seriously, it’s well worth considering stakeholder pensions for babies.

What is a stakeholder pension?

When stakeholder pensions were introduced in 2001, they came with a brand new feature: those on little or no income could save into a pension, and still get tax benefits. This means that children’s legal guardians can start stakeholder pensions for babies.

Once the stakeholder pension is set up, any family member can add to it, making birthday and Christmas presents a doddle. The key benefit of starting so young is that over many decades you can exploit the wonders of compound growth. This will transform even a modest sum into a serious nest egg for the future.

Check out our article on stakeholder pensions for more information. Also, see our step by step guide to getting a stakeholder pension.

Why set up a stakeholder pension for your child?

  • The tax-efficiency of a pension is a major benefit, because you get tax relief on any money you invest into pensions for babies. It means you can pay in up to £2,880 each year. This is then topped up by the government to £3,600.
  • The fees are transparent, and low. The only charge is an annual management fee of 1.5% on the total value of the fund that year, which drops to 1% after 10 years. Not every pension company charges the maximum fee allowable.
  • The money won’t be accessible until the child reaches 55. This means that they won’t be able to go on a spending spree with it at the age of 18.
  • It’s very flexible. You can stop and start contributions if your cash situation changes, and you won’t be penalised for it. The minimum amount you can put in at any one time is £20 gross (including the tax benefit). You can pay in nothing at all or up to £2,880 gross each tax year – in as many instalments as you like.
  • Parents and grandparents can invest on the child’s behalf. Granny and Grandpa can even leave money to their grandchildren’s pension without it being liable for inheritance tax.

Once the child starts working, they can contribute to the fund with up to 100% of their income – as long as it’s below the annual allowance of £40,000.

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How much is a stakeholder pension worth?

To look at the benefits of stakeholder pensions for babies in real terms, we’ve worked out an example.

If you invest a total of £2,880 each year for the first 10 years of the child’s life, then by the time they reach 55, they will have well over £700,000. If they wait until they’re 70, they will have over £1.8 million.

This is impressive, especially considering that it doesn’t include any additions to the fund throughout the child’s working life. Given that most people will be automatically enrolled into a workplace pension for at least part of their life, their fund will build up even further.

This example is based on an average annual return of 6%. The stakeholder pensions are normally used to invest in indexed-tracked funds, which means that there is some risk involved. These funds are managed by computers rather than by people in The City, and are designed to go up and down with the stock market. Over a number of decades, they have always risen in value, but there are no guarantees.

No. of years invested Contributed by family Contributed by government Total contributed Interest earned per year Total fund value
1 £2,880 £720 £3,600 £162 £3,762
5 £14,400 £3,600 £18,000 £886 £2,0581
10 £28,800 £7,200 £36,000 £1,991 £46,228
30 £28,800 £7,200 £36,000 £5,841 £122,657
55 £28,800 £7,200 £36,000 £19,779 £415,361
70 £28,800 £7,200 £36,000 £41,119 £863,506


Which stakeholder pension should you get?

All stakeholder pensions need to stick by the minimum standards, but there are some variations in the schemes and the funds they invest in. You need to start by getting in touch with pension companies and asking for their key facts document. Check this for charges, investment options, and minimum contributions.

If you are struggling to choose, and you have questions, you can get in touch with the free, independent advisers at the Pensions Advisory Service.

The good news is that you can transfer the fund to a different stakeholder pension provider at no cost. It means there’s no need to be overwhelmed by decisions. You can just make the best choice you can and revisit the fund regularly to check it is performing as you expect.

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