Pocket money, Porsches and pensions for childrenPosted on: 03 October 2011 by Andrew Stallard
Andrew Stallard considers life expectancy and pension value from the perspective of a child's pocket money
My twelve year old son George is saving his pocket money to buy a Porsche. At five pounds a week, it’s going to take a long time.
As a parent though, I'm more worried about how he's going to manage financially in the future. What options are there for making sure children have a safe place for their finances, and something to give them a financial safety net in the future?
The answer might not be what you expect: instead of £5 a week going into your child's piggy bank, how about £5 a week going into your child's pension?
When I put this to George, he looked a bit worried about his prospects of getting a Porsche, so I explained in a bit more detail.
Most people haven’t considered pensions for children, but youngsters can start a pension (or have one started on their behalf), pay in up to £2880 a year, and get a contribution from the government of £720 in the form of tax relief even though the child pays no income tax.
I did a calculation on what George’s pocket money might be worth if he put it into a pension every month. For ease of calculation I assumed he would pay £20 a month until retirement. Every month George’s £20 would be increased by £5 from the revenue – an instantaneous guaranteed return of 25% or over eight years in a building society, and that’s before it's invested. The calculation using growth rates set by the Financial Services Authority produced some surprising results.
At the higher rate of growth, George’s pension fund could be worth £346,000 at retirement and at the lower rate, £68,000.
The potential huge difference between the higher and lower figure is one reason to get expert independent financial advice on planning your retirement and any pensions for children.
“Wow. Over a third of a million pounds from my pocket money!” said George. "How do I make sure my pension grows like that so I can still buy a Porsche?”
There is no certain answer to this question as it really depends on how markets perform as well as on what investment funds you select. The performance of pensions for children or anyone else varies hugely, meaning that it’s really important to review your pension regularly and make sure you are on track for the podium rather than the pits.
George, however, still looked unconvinced and asked me what the catch was.
Not so much a catch, but there is a possible downside to pensions for children rather than a savings account - they can't access their money until they're 55. On the other hand, this can also be an advantage as it stops them spending the money too soon.
Many of us who have children would like to save for them, but one concern is that when a child reaches eighteen they can spend the money as they like, maybe on an unwise four wheeled purchase. This was an issue many people had with the now obsolete Child Trust Funds. Paying money into a pension though means that it's there long term. Parents and Grandparents can also help out with lump sum payments to the pension, all receiving tax relief if it's within the £2880 annual limit.
With hugely increased life expectancy, pensions for children are there to provide for many years of retirement, potentially the longest holiday of our lives, so having it locked away can be a great help.
As George said, it’s no fun on holiday with no pocket money
And finally, what about the Porsche? George was impatient to know. Could he still use his pension to buy the car of his dreams?
Well, from the age of 55 you can take a quarter of your pension as a tax free lump sum, to buy whatever you like, including a Porsche.
The value of shares and investments can go down as well as up.
Past performance is not a guide to future performance.
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