Yes, you read the title correctly. You can take an action today which could give your children hundreds of thousands of pounds in the future for ‘free’. How? Junior pensions! That’s right, a Junior Pension.
If you have not heard of a Junior Pension, you are not alone. A Junior Pension is a savings account* that you set up for your children (or grandchildren). You can pay up to £2,880 per year into it. The government then tops up the amount you add by 25%, taking the total up to a maximum of £3,600 per year. This money is held in your child’s name and invested on their behalf, tax-free, until they can access it from age 55.
Before I ‘show you the money’ in more detail, let me first explain why starting a pension for your children is so important.
It’s never too early to start saving in a pension
For generations, companies enrolled their employees in generous pension schemes. This meant that those entitled didn’t have to worry about having money in their retirement. Their company sorted it all for them. That meant they could focus on buying a house and raising a family.
Today that is, sadly, not the case. Company pensions are a lot less generous than before. This means that we all need to make sure that we have enough money for our own retirement.
The hard part is that we need to think about our retirement whilst also having money to buy a house and raise a family. The financial pressure is high.
That financial pressure is likely to get even higher for the next generation, our children. House prices are rising. And according to the Office of National Statistics, a 5 year old today is likely to live over 3 years longer than a 40 year old today. This means they’ll need to save enough money to cover those extra years of retirement.
This is why it is so important for parents and grandparents to consider a Junior Pension. Junior Pensions could be the next generation’s saviour.
Starting to save for a pension from birth means your children could have over £2,500,000 saved for their retirement. This would take a lot of financial pressure away from them. Best of all, over £500,000 of this amount would be ‘free’ money paid by the government in the form of tax relief.
The numbers behind Junior Pensions
Now, you’re probably wondering what it takes to get to these amounts, right? Let’s look at the numbers.
For example, imagine you start saving in a Junior Pension for your child from birth. Paying in the maximum (£2,880 per year), which gets topped up by the UK government (up to £720 per year), means the amount in the account would be £64,800 after 18 years.
Like adult pensions, the Junior Pension is enrolled with a private pension provider. They invest this money in the stock market. Since this money is invested the entire time, it means that by the time they are 65, the money could grow to well over £2,500,000**. Remember, the government tops-up contributions by 25%. This means that over £500,000 of this amount is ‘free’ money that the government has added to your child’s pension pot.
The power of compound interest
Now, for a lot of parents, paying £2,880 per year into a Junior Pension might be too much. Starting by saving a smaller amount, or starting when they are older, will still make a massive difference. For example, paying in £1,200 per year, or £100 per month, from birth is expected to mean they will have over £1,000,000 when they are 65.
Let’s put this into context of an adult saving for a pension. If you are 40 years old now and want to have £1,000,000 when you are 65, you’d need to save around £1,300 per month over that 25-year period. This is in comparison to saving just £100 per month for 18 years for your child to get to the same amount at age 65.
This is due to the power of compound interest, which means the money doubles approximately every 10 years*. Even if you started saving £100 per month from the age of 9 until they were 18, your children could have a pension pot of over £350,000 at age 65.
Junior Pensions are a family affair
Whilst most parents would love to save for their child’s retirement, they may prefer to prioritise other financial commitments, such as helping them make the deposit on their first home or buy their first car. Many parents simply cannot afford to save for all of these things plus contribute to retirement savings. In this case, grandparents could be a good source to help out, especially if you have more than one child. It’s a topic worth discussing with them.
Not only is it a fantastic way for them to help ensure that their grandchildren’s retirement is as secure as theirs, it may also help them avoid inheritance tax on the money they contribute.
Help your children plant money trees
When you start saving for your children’s pension, make sure you let them know about this money. Research from Cambridge University shows that children learn many of their money habits from observing their parents. The more they witness you saving for them and seeing their money growing due to compound interest, the more likely it is that they’ll want to save their own money into a pension later on.
The simple way to help your children understand their savings is to visualise it. Get them to picture money as seeds. These seeds can be given away (spent) or planted (saved). If they put money in a savings or investment account, such a pension, then these seeds will grow into beautiful trees. These trees will start to produce more seeds which can be planted and grow more trees. Over time, they will have their own financial forest.
When it comes to saving in their pensions, they will be growing a forest which is hidden away for many years. Not only are you, as parents and grandparents, planting seeds for them, the government is also planting seeds. By the time they are old enough to go to their forest (starting at age 55) they will have a forest with many trees.
Their money forest will have grown to a massive size over all those years of saving. Of course, the more trees they have, the better.
Make saving for retirement a habit
It goes without saying that the sooner we start to save, the easier it is to get into the habit. With more than 15 million Britons not saving adequately for retirement, there has never been a more urgent need to make pensions a cornerstone of our financial planning, and to teach our children to do the same.
Companies like Maji are helping to close the pension savings gap through financial planning and automatic savings tools. But ultimately, as parents and grandparents, we all need to do our part to make sure the next generation don’t have the same financial worries as so many people do today.
Junior Pensions are one solution. The long-time horizon for these savings to grow, plus the added government top-up, means that the amount required to make a huge difference is a very good deal.
About the Author
Will Rainey is a Maji financial coach. After years providing investment advice to some of the world’s largest pension schemes, Will founded Blue Tree Savings Ltd to help parents teach their kids about money. Get more tips to help your children learn about money related topics at www.bluetreeblog.com,
* A Junior Pension be set up as a Stakeholder Pension or Self-Invested Personal Pensions (SIPP) and offered by many of the major pension providers.
** The calculations in this post assume that any pension saved is invested in the stock market and grows at just under 7% per year. This return is based on historical averages less an allowance for costs. Actual outcomes could be higher or lower than this amount.