Setting up a pension plan for your child and putting £2,880 in each year will help give them a wealthier retirement. Current pension rules allow a parent to contribute up to £2,880 for a child under 18. Tax relief means that this figure is topped up to £3,600.
If the parent starts making annual contributions when the child is born and continues until they are aged 18, then this would add up to £52,000, and under current rules this would be topped up by around £13,000 in tax relief.
OTHER SAVINGS OPTIONS
For parents who want to give their offspring money earlier, they can save up to £4,368 tax-free in a Junior ISA in the 2019-20 tax year. Invested in a medium-risk fund this could be worth up to £110,0004 by the time they reach 18, if you paid in £364 a month for 18 years, although as the value of investments fluctuates, this may not be the case. Income and gains on the money saved are tax-free. If you’re unable to afford the full subscription each tax year, small regular sums build up over time too.
Assuming growth in investments over the period, your child could have a sizable pension pot and ISA fund to draw upon, the spending power of which will depend on the passage of inflation over the intervening years.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.