Pensions for kids

[plums]

Has anyone ever set up (or been the beneficiary of) a pension fund for a minor?

I read an article recently which highlighted the potential growth that could be obtained from a relatively modest investment as a result of 40-50 years of compound interest.

The article quoted an investment of £20 per month from birth until 18 (£4320.00 from the parent) which if topped up with a further £30.00 a month by the child until the age of 55 could result in a pension pot of over £340,000.00. Of course, it is all market dependent etc

My daughter is already well provided for with ISAs and will have a tidy lump sum at 21 but this seems like a good way of setting her up for life. Would also make saving for retirement more attractive if she already had a decent wedge accumulated in a pension at 18.

Would appreciate any thoughts.

Thanks.

[ellroy]

Arranged for a couple of clients to do it for grandchildren over the years. Very sensible bit of tax planning in my opinion and shouldn't cost the earth either.

[fat80b]

We did briefly think similar things.

I have a concern though that this is tying money up for an incredibly long time and in that time the legislation could change significantly.You're effectively taking a 60 year bet.

Would you not be better off investing in your own / wife's pension (to get the 40pc tax break on the way in) and then gifting the pension income when you retire to fill an ISA for the child? This could be a 15 year bet for the an equivalent* result?
(or is this overly complicated)

Bob

Unless you are already at the limits of your own & wife's pension and have a plan to carry on maxing out everyone's ISA for ever. In which case, stop worrying and invest in coke and hookers instead

[Ginge R]

To an extent, the 2015 pension freedoms diminished the case, as has ever increased uncertainty over the likely direction of the pension wrapper. But, it's still a potentially cracking course of action for some parents/grandparents to consider.

[Jon39]

My own view is that it would be a ridiculous trap.

You talk about compounding which can become unbelievable, but that is a feature that is not just available to pension savers.

Financial advisers are very keen on promoting pensions. Expect you know why.

Future flexibility is far more valuable than the oft promoted income tax relief, which might not even be available to infants, and just look at how the pension rules have been changed recently by politicians.

[ellroy]

Jon39 said:

My own view is that it would be a ridiculous trap.

You talk about compounding which can become unbelievable, but that is a feature that is not just available to pension savers.

Financial advisers are very keen on promoting pensions. Expect you know why.

Future flexibility is far more valuable than the oft promoted income tax relief, which might not even be available to infants, and just look at how the pension rules have been changed recently by politicians.

Because it makes good sense and you clearly don't know what your taking about. If you did you'd know that tax relief up to £3,600 gross is available to all irrespective of if they have taxable income or not. You'd also know that there are no commissions payable on products anymore so you pay a fee for the advice you receive so the snide "you know why" does you little credit and adds nothing to your credibility either.

It also allows you to pass from allowable income, for IHT purposes, or annual gift allowances. It thus make a decent pot of funds that are IHT exempt and will only be of use in later life, so precluding youngsters throwing away your hard earned at college or pissing it up the wall. But hey you clearly know best.

[Ginge R]

Jon39 said:

My own view is that it would be a ridiculous trap.

You talk about compounding which can become unbelievable, but that is a feature that is not just available to pension savers.

Financial advisers are very keen on promoting pensions. Expect you know why.

Future flexibility is far more valuable than the oft promoted income tax relief, which might not even be available to infants, and just look at how the pension rules have been changed recently by politicians.

I'll take issue with one of two aspects with your post, if I might. Advisers have no incentive to advocate one wrapper over another. They may have once, but that's probably quite a while back.

Flexibility is key, sure, and no adviser that I know would ever advocate subordinating doing what is right over what is more profitable simply because a spot of tax relief is available. I'm sure that some do exist though. 'Flexibility' is neither more, nor less, important. All cases are different.

[K12beano]

Jon39 said:

Expect you know why.

That sounded like the type of argument that would have been thrown up in the past about Advisers' motives.


But perhaps you mean something else (now that commissions and other remuneration from providers no longer affects the balance)?

[Jon39]

ellroy said:

Because it makes good sense and you clearly don't know what your taking about.

Controversial.

You have your opinion, but with your tax relief and pension, could you finish work soon after 50, and then enjoy life with increasing dividends paying all the bills?

PEPS and ISAs have provided the flexibility and the tax wrapper to do just that, providing the investment strategy was correct. No tax relief of course on contributions, but a beneficial and simple tax situation later.

[oldaudi]

My kids have them. Aged 10 and 7 they've had them for 7 years.. I know the goalposts will change inthe future but I want to give them as much as a head start as possible. There are other wrappers available for their savings which they also have but whilst the government top it up with 20% I figured I'll grab all I can for them. I pay in monthly manage alongside mine and they're doing well

Edited by oldaudi on Friday 20th January 22:47

[Jockman]

My 3 daughters have them My 3 grandsons have them. I would highly recommend

[Ginge R]

oldaudi said:

My kids have them. Aged 10 and 7 they've had them for 7 years.. I know the goalposts will change inthe future but I want to give them as much as a head start as possible. There are other wrappers available for their savings which they also have but whilst the government top it up with 20% I figured I'll grab all I can for them. I pay in monthly manage alongside mine and they're doing well

Edited by oldaudi on Friday 20th January 22:47

I started pensions for mine when they were young teenagers. It wasn't a one shot strategy, but part of a bigger plan. Although pensions are not right for every young saver, they were instrumental in allowing my kids to grasp the fundamentals of saving for retirement, and now, with their own occupational pension provision, they are ahead of the game. When they see their growing (hopefully!) funds, they can see they, at least, have options.

The biggest killer in saving for retirement is contending with the cost of delay. If I were to point to one single reason why pension saving for the young should be considered, it's because we must assume that most adults need to save effectively for retirement, and the pension wrapper is still a seductive proposition. The later in life that most people begin contributing to a pension, other things being equal, then they will have to pay larger contributions to catch up to ensure a decent retirement income.

If we assume too, that most twenty year olds have neither the means nor capability to save, then traction and time is lost. If we assume further, that by the time half decent wages get established, then nappies need to be paid for - and pensions and insurance get demoted further in the list of priorities. Real people too, have difficulty is grappling with how much they have to save, psychologists attribute that to 'hyperbolic discounting' and even the part of the brain which can plan for one's future, developing at a later, slower rate.

As ever, it's not right for everyone, but all things being equal, starting earlier for children *can* anticipate 'life' getting in the way and provide a little breathing space. It's intangibles like those that you, and Jockman et al, may well have tapped in to.

[ellroy]

Jon39 said:

Controversial.

You have your opinion, but with your tax relief and pension, could you finish work soon after 50, and then enjoy life with increasing dividends paying all the bills?

PEPS and ISAs have provided the flexibility and the tax wrapper to do just that, providing the investment strategy was correct. No tax relief of course on contributions, but a beneficial and simple tax situation later.

Not controversial you don't understand tax relief on pensions, as per your first post. PEPS are no longer available and have not been since ISAs were introduced, they replaced them to be technical. With your undoubted knowledge, exhibited thus far, could you look into the future and tell me when the children will want to retire some 50 years or so down the road or what pension, or alternative provision, they will receive form what ever they are in at the time? Considered the tax implications on gifting an ISA and the resultant loss of tax saving wrapper to you and the kids, given they can't hold direct equity or funds until 18, unless through limited children's ISA or via a trust with associated tax issues, costs and legals?

No? Thought not.

Edited by ellroy on Saturday 21st January 10:04

[pincher]

Ginge R said:

Although pensions are not right for every young saver, they were instrumental in allowing my kids to grasp the fundamentals of saving for retirement, and now, with their own occupational pension provision, they are ahead of the game. When they see their growing (hopefully!) funds, they can see they, at least, have options.

I think that's a very important point - I really do believe that this kind of thing (and handling finances in general - especially in this borrow now, pay later world we live in) should be part of the school curriculum. An hour a week would give kids so much more of an idea of how the real world works.

My financial planning over the last few years has been frankly woeful but I'm getting some help with that now ( ) and really wish I had done it much sooner - I haven't been pushed into anything but what has been suggested so far makes sense and I think I've made some progress, which i more than can be said if it had been left down to me.

[Jon39]

[
quote=ellroy]

Not controversial you don't understand tax relief on pensions, as per your first post. PEPS are no longer available and have not been since ISAs were introduced, they replaced them to be technical. With your undoubted knowledge, exhibited thus far, could you look into the future and tell me when the children will want to retire some 50 years or so down the road or what pension, or alternative provision, they will receive form what ever they are in at the time? Considered the tax implications on gifting an ISA and the resultant loss of tax saving wrapper to you and the kids, given they can't hold direct equity or funds until 18, unless through limited children's ISA or via a trust with associated tax issues, costs and legals?

No? Thought not.


[/quote]

Thank you for going into such detail.

Having achieved an average annual growth rate of 14·16% over 29 years, and 22.17% last year, you do make me wonder how that was even possible, if I have such a poor knowledge of finance.

My own preference is simply to retain as much investment flexibility as possible, because so much can change with economics (even though I tend to make very few portfolio alterations), rather than being influenced by initial tax incentives, and then being locked into extremely long restrictive contracts.

Oh, and there is a way for children to hold direct equities, without costs or complications. My children did just that, and now have a dividend income from their own funds. Think designated accounts and for tax efficiency, grandparents. I can even remember being able to reclaim the tax credits on their dividends, because of their available personal allowances. However that long-standing benefit to pensions, charities and those with unused personal income tax allowances, was suddenly changed by the government. That change had a major effect on the pensions industry at the time, because of the enormous sum of money in total which was forfeited. £5 billion per year I think was mentioned. Another example of being in a pension contract, the rules were changed, but it was the customers who lost.

Share PEPs did run for a while after the introduction of ISAs. All existing PEPs were eventually merged and became ISAs

As for predicting the future, I always leave that to others. Have a look at the Share Tips topic.

I wish you good success Ellroy, with your own investments.

Edited by Jon39 on Saturday 21st January 16:16

[ellroy]

Children do not hold them they're in a bare trust, at 18 they are then theirs full stop. Irrespective of sense or requirement, right for you perhaps, but not for the majority I'd suggest.

No one could claim back dividend, or rather advanced corporation tax, relief against nil rate other than the new dividend allowance that has just introduced when it change under GB. That includes charities, trusts etc etc You cannot make payments to your children, outside of gift limits without IHT implications or and indeed interest rate penalties with respect to a parents own tax liabilities. So your 'advice' based solely only your situation is hardly telling the whole story is it?

Your investment performance is neither here nor there, as impressive as the numbers may, or may not, be. You could have achieved more in a pension due to the tax relief and more funds would pass to the kids free of IHT. Your views on contracts, commissions and the relics available do not alter these very basic facts,

If the OP has little investment experience your appoach is tantamount to asking him to throw money down the drain.

Edited by ellroy on Saturday 21st January 18:41

[Jon39]

ellroy said:

You could have achieved more in a pension due to the tax relief ...

You make your opinion, sound like a fact.


Not to do with OPs question, but this might surprise you.

a.) A 30 year service, defined benefit pension in payment, with annual RPI increases.

b.) An equity portfolio, mostly FTSE100 international non-cyclical businesses.

Year 2000 - Net annual income from a.) exceeds b.)

Year 2016 - Net annual income from b.) is now DOUBLE the income from a.)

Quite remarkable, and nobody could predict that would happen, particularly with an RPI DBS scheme, but it shows just what good British businesses are capable of achieving.

Low inflation during that period obviously contributed to the result and the tax on a.) is at a higher rate than most of b.)
A large part of b.) is sheltered from higher rate tax in an ISA, which only has a £36 capped annual charge and free withdrawals.

Pensioners probably do not have many ways, of substantially increasing their incomes. Any dodgy joints could make physical employment unpleasant. This of course all points to the importance of planning well ahead.

Tax relief on money going in to pensions is of course very attractive, but there is a possibility of higher rate tax being charged during retirement, which perhaps might not be necessary with an ISA shelter (under present rules anyway).

Edited by Jon39 on Saturday 21st January 20:42

[drainbrain]

With all the millennial moaning about being excluded from the property market, rather than 'do your nut in' trying to work out what financial instrument will do what over the next 50/60 years, why not buy your newborn a nice 1st time buyer property on a 18/21/25 year mortgage and rent it out so the rent pays the mortgage?

I mean, your kiddie MIGHT need a pension in 50-60 years time, but it'll definitely need somewhere to live. And if it turns out to be a self-sufficient kiddie capable of getting its own house, then you can do what you like with the property. Keep it. Gift it. Sell it and buy something else. Remortgage it. Or, if you really must, sit and worry about it. Flexible, boringly predictable, and not an unuseful thing for a young adult to have.

'Ouses, 'ouses, 'ouses.....what every kid really needs.

http://www.derbypropertyblog.co.uk/wp-content/uplo...

Edited by drainbrain on Saturday 21st January 20:34

[ellroy]

Jon39 said:

You make your opinion, sound like a fact.


Not to do with OPs question, but this might surprise you.

a.) A 30 year service, defined benefit pension in payment, with annual RPI increases.

b.) An equity portfolio, mostly FTSE100 international non-cyclical businesses.

Year 2000 - Net annual income from a.) exceeds b.)

Year 2016 - Net annual income from b.) is now DOUBLE the income from a.)

Quite remarkable, and nobody could predict that would happen, particularly with an RPI DBS scheme, but it shows just what good British businesses are capable of achieving.

Low inflation during that period obviously contributed to the result and the tax on a.) is at a higher rate than most of b.)
A large part of b.) is sheltered from higher rate tax in an ISA, which only has a £36 capped annual charge and free withdrawals.

Pensioners probably do not have many ways, of substantially increasing their incomes. Any dodgy joints could make physical employment unpleasant. This of course all points to the importance of planning well ahead.

Tax relief on money going in to pensions is of course very attractive, but there is a possibility of higher rate tax being charged during retirement, which perhaps might not be necessary with an ISA shelter (under present rules anyway).

Edited by Jon39 on Saturday 21st January 20:42

Defined benefit versus an effective defined contribution approach?

Dear, oh dear do try and at least pick an argument that has merit.

You really are a very special kind of dumb. Your argument is essentially asset X has outperformed asset Y, but you just don't see it and I really can't be bothered with it anymore.

OP take some professional advice, not from some half wit, who knows best because his funds have gone up in a bull market.

Edited by ellroy on Saturday 21st January 22:04

[Jon39]

ellroy said:

OP take some professional advice, not from some half wit, who knows best because his funds have gone up in a bull market.

OP. Also, do try to avoid rude people who are so uninformed and blinkered, that they believe there were no recessions or bear markets, during the past 29 years.

My apologies if a memory difficulty is involved. After all, one of the most severe economic crashes happened less than 10 years ago.