It might sound like an odd idea but children's pension schemes are becoming an increasingly common way for parents, grandparents and other interested parties to give children the best possible leg up on road to effective retirement planning.
In effect, a children's stakeholder pension is no different than anyone else's pension. Anyone can pay into the pension - provided the parents or guardians are aware - and the pension fund is invested in exactly the same way.
How does a children's pension scheme work?
You can pay in up to 3600 pound a year into a child's personal pension (2880 pound plus the basic rate tax relief at 20%) and because it's free from income tax and capital gains tax the fund will grow even faster (although the "child" will have to pay tax when they access the pension on retirement).
If you were to start a children's pension scheme at birth, the fund would have had 16-18 years of contributions and stock market growth by the time your child starts to contribute themselves - giving them a substantial head start.
If you paid in the maximum amount each year, it would be like starting a pension scheme at 18 with a six-figure lump sum contribution.
So how does that affect the value of a pension scheme at the time of retirement?
Well, the longer you save for retirement, the better the returns from your pension fund are likely to be.
Even a children-s pension scheme on which contributions stopped at age 18 could be worth in excess of 1.3 million pounds by the time the child is 60 (based on 7% growth a year). When you compare that to a scheme started at 18, the figure is around half as much despite requiring 42 years of contributions.
How do you start a children's pension scheme?
Speak to your financial adviser. When dealing with growth over such an extended period even the smallest differences in the rate of growth of the pension fund could have a dramatic affect on the value of the pension on retirement.
Once you have chosen a pension plan, you can choose to make either one off contributions or pay regular contributions on a monthly basis - subject to the minimums required by the scheme.
The next step is simply to keep an eye on the progress of the pension fund and speak with your independent financial adviser regularly to ensure you're getting the most from your money - and that your child is too.
Author Resource:-
Gareth Flanagan is an independent financial adviserwith Principle First Financial Services one of the UK's few firms of Chartered Financial Planners. To discuss your options, or receive
financial advice visit us on-line.
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