Pensions: why Junior ISAs and SIPPs are a good idea for your kid's retirement

After becoming a father, Dan Atkinson got to thinking about his new child's retirement funding. He tells us the three reasons why he set up a pension for his daughter.

Saving for your pension is vital, but yours might not be the only one to consider.

As a 33 year old, retirement seems a long way off. Last year I became a father and my long term financial planning now includes child care and university.

Retirement for me feels a lifetime away, but regular savings through our auto-enrolment scheme should mean that retirement is possible.

So why would I want to start saving for my daughter’s retirement? At the tender age of six months she has 67 and a half years until she hits State Pension age.

In reality it may be even further away, so this is exactly why I should be thinking about it.

Here are three reasons why I think making a pension contribution for my daughter might be a good idea.

Plan  for your child's future: view your options in the loveMONEY investment centre

Tax relief

 Most people under the age of 75 can make pension contributions of £3,600 gross each tax year even if they have no earnings. This pension contribution is paid net of basic rate tax – even if no tax is paid by that person.

So £2,880 paid into my daughter’s SIPP instantly becomes £3,600. A 25% increase on day one is a good start and we can repeat this for her every tax year.

Access

Whilst we all hope that our children will be financially prudent, having a large amount of cash at age 18 might not be the most sensible thing. They might not spend it all frivolously, but I know that I am more financially savvy now than I was then.

I have invested in a Junior ISA for my daughter, so she will have some money when she enters adulthood. I’d like to think that this will help fund her way through university.

However money going into a SIPP is locked away for much longer. Under current rules she would be able to access this at age 55, but these are likely to move towards 10 years before State Pension Age. This money would be available to give her a start with her retirement planning.

Invest for your child's future: view your options in the loveMONEY investment centre

Long term investment

Investing for the very long term means that you achieve growth on growth (compounding). 

The chart below shows how much money my daughter's SIPP could be worth at age 68 if I invested £2,880 net each year for her until she is 18. A return of as little as 2% per annum after charges could generate a fund of £226,000. This would certainly help her out.

Returns over the long term (Image: EQ Investors/Dan Atkinson)

Credit: Dan Atkinson

However, as this is a very long term investment we would tend to allocate more money to equities.

In the short term the fund value would fluctuate more than we might normally feel comfortable with. In return for the increased risk we would expect to see greater returns.

Dan Atkinson is the head of technical & chartered financial planner at EQ Investors.

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