Current legislation allows an interesting investment opportunity for parents and grandparents - setting up a pension for children.
This may seem ridiculous to some but consider the facts:
Consider the following scenario for two children:
The first child’s parents / grandparents contribute the full allowance of £3,600 (or £2,808 net of tax relief) to a Stakeholder each year for him or her from birth to age 21. The second child is not so lucky and there is no contribution set up.
The following outlines the difference at retirement:
At age 21 the fund value of her Stakeholder plan would already be £152,000 (not a bad pension fund for a 21 year old). If no more payments at all were paid into the account and the fund grew until aged 60, the fund value would be £1,475,000. If the child were then to draw income of 5% from the capital accumulated, they would be able to draw an income of £73,750 pa.
With no head start, this child has no pension fund at age 21. In order for him to get an equivalent pension to his sister at age 60 (a fund value of £1,475,000), this child would have to contribute £800 per month from age 21 to age 60.
Note: Fund values are based on annual contributions of £3,600, a 7 per cent growth rate, and a 1 per cent annual management fee.
All in all, it’s a very worthwhile exercise for wealthy parents/grandparents to contribute to a Stakeholder on behalf of a child.
Please do contact us if you wish to discuss establishing pension investments for your children or grandchildren.