An alternative nest-egg
Young children may curse you for buying them a pension rather than an X-Box 360 or iPod, but thousands of grandparents and parents are squirreling away money in pensions for dependants early on in life to ensure that their offspring are financially secure in retirement by their 18th birthday.

One of the most cost-effective ways of saving for children is through a stakeholder pension. These were launched by the Government in 2001 to encourage people who were not saving for their retirement to do so.
Every individual has an annual stakeholder allowance of £3,600, which once their basic income tax allowance is taken into account, reduces the effective cost of this contribution to £2,808. This money can be paid into your own stakeholder as well as into a scheme on behalf of someone else.

Paying into a pension for a child can be a robust proposition as it is tax efficient and, as the money will be tied up until the child is at least 55, it cannot be frittered away.

Such long investment horizons, combined with the tax advantages associated with pensions, mean that relatively small regular contributions made early in life could transform into a very sizeable pension pot in the future.

One of the biggest advantages of investing in this way is the ‘free’ money received through the top-up contributions made by the Government, and the potential for compound growth.

Given the recent proposed changes to the tax treatment of trusts, paying into a pension scheme is also a more certain way to provide for dependants without becoming vulnerable to inheritance tax.

Gifted pension contributions are not generally subject to IHT as they fall short of the £3,000 annual gift limit, which you can give away to one individual in any tax year free of tax. They may also qualify for exemption under ‘normal expenditure’ rules, which allow you to gift an unlimited amount as long as it is not deemed to diminish your lifestyle.

Clearly, with such a long-term investment horizon, choosing the right underlying investments is crucial. To find out more, please email or contact us.