Have you ever thought about starting a pension for your children? It’s a tax-efficient way to pass on wealth and you could make them adult millionaires by starting a pension pot when they are born.

Children born this year could be millionaires at retirement age

If your child was born this year, they could become millionaires by their 43rd birthday if you contribute to a pension for the first 18 years of their lives. Parents or grandparents contributing £2,880 per year (£3,600 after tax relief) until their children turn 18 years old could create a pot of £1,021,837 by 2062. Assuming a total contribution of £51,840, a growth rate of 8% per annum, and is net of product charges.

While lower growth rates reduce the return, they would still leave children with a substantial pot of cash to help them retire. Average growth rates of 2% and 5% mean that, by the time the child reaches its 55th birthday (2074), they would have a pot of £171,086 and £668,592 respectively. On an average 5% growth rate, the child would be a millionaire by the time they retire in 2084 (65 years old), with a pension pot of £1,089,067. By the same milestone, a growth rate of 8% would create a pension pot of £5,555,260.

Why do very few people consider a pension for their child?

Very few people consider contributing to a loved one’s pension, however, most people would leave their family an estate when they pass away and help their family with ongoing gifts of any kind. Opening a pension means that you could pass on your wealth without creating Inheritance Tax liabilities as pensions are tax-free.

Contributing to a family member’s pension is one of the last thoughts to cross the majority of people’s minds. Yet, provided growth rates remain at current levels, it could make a millionaire of a child born today. It’s the power of compounding interest in action.

One of the biggest obstacles to passing on wealth tends to be the parents or grandparents worrying that their younger family members will ‘waste’ the money on frivolous purchases. But, pension contributions guarantee that their children won’t be able to use the proceeds until they are pensionable age.

Reasons why you should contribute to your child’s pension:

  • Pensions are tax-efficient ways to pass on wealth. Making regular contributions to a child’s pension may not seem like the obvious choice. However, given the flexible nature of pensions and the tax relief offered by the Government, they can provide a very simple way of securing children’s financial future in retirement.
  • Money in a pension is tied up until the age of 55. Unlike Trust Funds or Junior ISAs which get given to the child when they are 18 (or 21). This means that you can be sure your child isn’t going to waste their savings the moment they hit adulthood.
  • Investing in a pension for your children or grandchildren’s pension from the moment they are born means the compounding interest has the time (potentially 55 years if not more) to build over their lifetime. It could leave them a huge sum by the time they reach retirement age.
  • The pension age is creeping up and with the Government encouraging everyone to save for our own pensions rather than relying on the State Pension, it is more likely that by the time today’s children get to retirement the State Pension would have changed a lot whether that be reduced or even disappeared completely. You will be ensuring they have a pension they can rely on without having to save into one for themselves, leaving them spare cash to spend on buying a house, having a family or building a business.

Do you need help with opening a pension for your child?

Saving for a child today is a wonderful gift for their future. There’s no time like the present to take steps towards making the most of retirement savings for your children. To discuss your options, please contact Chris Slatter on cslatter@ellacottswealth.co.uk or 01295 250401 or contact us here.

We can also help you to manage your wealth by advising on investments and tax planning strategies to minimise your tax liabilities.