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Should you be encouraging parents to start pensions for their children?

15 October 2018

For parents and grandparents trying to determine whether they should invest in a pension pot for their child, data has shown that they could see their savings grow into a significant pot over 18 years. 

The retirement specialist Retirement Advantage (now Canada Life) found that if £100 a month was saved on behalf of a child from birth until the age of 18 it could grow to be as worth as much as £284,316 at age 67.

By contrast, if an individual started saving at the age of 30, they would need to make a monthly contribution of £214 for 37 years to achieve the same pension pot. If this were to rise to age 40, as much as £372 would need to be put aside every month for 27 years.

Andrew Tully, pensions technical director at Retirement Advantage described a pension as one of the “best gifts” to be given to children or grandchildren.

He said: “It may seem daft to think about a pension when you’ve just started a family, but it could be the best financial start in life. Not only do you hopefully create a savings habit early on, but the pension contributions are helped by the effects of compounding interest. Over time, you receive interest on the interest and this can be one of the most powerful forces in finance.”

While Tully said successive governments have a habit of changing the pension goalposts, it should not deter families from taking full advantage of both tax relief and compound interest when it comes to saving for children.

Parents and relatives can save up to £2,880 a year into a pension on behalf of a child, with the government topping that up to £3,600 through tax relief. The child can continue to pay into the pension when they take ownership at 18 years old, or can leave it to grow.

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