Published On: Wed, Dec 18th, 2019

Pension: How you could boost savings for grandchildren by £720 | Personal Finance | Finance

From financial gifts to the fast-approaching New Year prompting some to take a closer look at their finances, parents and grandparents alike may be looking into ways to save for the little ones in their life. Ahead of the festivities, NFU Mutual’s chartered financial planner Sean McCann has shared some insight into financial gifts loved ones could be given this year.

“When your child or grandchild is in their 20s or 30s, and should be investing in their pension, the likelihood is they’ll have lots of other calls on their income.

“By starting a pension for them early, you’ll have given them a valuable leg up. Because of the generous top-up you’re restricted to a total contribution of £3,600 each tax year.”

Assuming a child has no earned income, the most that can be paid in to a Junior Pension is £2,880 each tax year, as Mr McCann explained.

Should this figure be paid in, HMRC will then top it up by £720, to give a total of £3,600.


So, how much could the pension fund reach?

Mr McCann said that for a new born child, if £3,600 was paid into the pension every year up to the age of 65 then, assuming four percent pa growth after charges, it would produce a fund of £1.12million.

For comparison, if a 30-year-old paid £3,600 into a pension every year up to the age of 65, assuming the same four percent growth after charges, it would produce a fund of £275,000.

Mr McCann added: “This shows the power of compound growth over time, but it’s important to remember the impact of inflation on the buying power of money.”

According to NFU Mutual, should parents pay the full amount into a Junior Pension from the age of zero to 18, but then the child didn’t pay into it when they were an adult, the pot would be worth £94,677 at the age of 18, and £618,529 at the age of 65 due to compounding – assuming four percent pa growth after charges.

Another way of saving money for children could be in a Junior ISA.

Junior Individual Savings Accounts (ISA) are long-term, tax-free savings accounts for children, and in the 2019 to 2020 tax year, up to £4,368 can be saved into these accounts.

Mr McCann said: “A Junior ISA is the perfect Christmas present for those parents eager to teach children the benefits of saving and investing.

“You can put away lump sums and/or regular amounts up to a maximum of £4,368 each tax year.

“When your child turns 18, they can take out some or all of the money or leave it invested until they need it. Any growth is free of tax, making it a great way to save for a house deposit or a gap year.

“For those worried about giving their child access to a large lump sum at the age of 18, the alternative is to consider an investment written in trust, which allows you to decide when the time is right to give them the money.

“Trusts can be very simple to set up and most financial advisers can provide you with the appropriate forms free of charge.”

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