Given the huge costs involved in raising a child and early adult life, it might seem strange to pay money to a pension which cannot be accessed for decades when there are many other expenses to worry about. However, the long term tax benefits of pensions plus the Government top-up can make for a compelling case in certain circumstances.
Money put into a pension for a child has longer to grow in a tax-free environment, and cannot be frittered away in early adulthood. By contributing the maximum allowed to a Junior SIPP each year for 18 years you could provide your child with a retirement fund of over £400,000, even if they make no other contributions as an adult.
The government encourages pension saving by topping up contributions with an extra 20%. The maximum that can benefit from this uplift is your total salary. Where individuals do not have any earnings, the government will still add tax relief up to a maximum of £3,600. If you contribute £2,880 to a child’s pension, the government will top this up to £3,600.
To read more on the best ways to help your children secure their financial future, download our new ‘Investing for Children’ guide.
Related case studies
Liz and Roger are both high earners working in banking. They want to invest tax efficiently for themselves and their children so have already contributed the maximum allowable to ISAs, Junior ISAs and their own pensions.
I have a question...
Some Free EQ Guides
Coming into money isn’t something that happens often. Before you commit yourself to spending, investing, giving gifts or even giving up your job, here are some tips on how to make your windfall work for you in the long run.
EQ is a Chartered Financial Planning firm able to offer a wide range of services to private clients including tax optimisation, retirement income planning and estate planning.
The April 2015 Budget saw the most radical changes to the pensions landscape for a generation, but the new flexibility on offer is only available to personal pension holders. Members of final salary schemes can only access the new rules by transferring to a personal pension.
This guide explains how planning ahead of time can provide for – and in most cases reduce – the amount of tax that is ultimately due on your estate.