Or have you given a baby a christening present in the form of Premium Bonds or opening a savings account for them?

They do say it’s never too early to start saving, and parents often look at ways of investing money on behalf of their children for their futures.

But what about setting up a pension for your child?

Well, that’s not actually such a bad idea, and it can be more tax-effective than opening a junior individual savings account, known as a Junior ISA.

Here’s a Q&A to explain the pros and cons.

Q: What benefits are there? Children don’t pay tax!

A: Of course, they don’t pay tax, but they can still take advantage of the 20 per cent tax relief on any contributions (i.e. contribute £80 and invest £!00). Paying into a pension in their name can be a remarkably tax efficient way of putting money away for your children as a long-term investment.

Q: What other benefits are there?

A: There are the potential gains from stock market returns over decades rather than years, and your children won’t have to rely solely on a workplace pension, which is not as generous as private pensions.

Q: So, what should I be looking for?

A: You should be looking to take out a Self- Invested Personal Pension (SIPP) in your child (or children’s) name – a Junior SIPP.

Q: How much can I invest in the pension.

A: The maximum net contribution each year is currently £2,880, to which the government adds a further £720 in tax relief. That makes a total of £3,600 which can be saved tax free every year.

Q: Can I invest more than that?

A: Yes, but you won’t benefit from tax relief so it doesn’t really make sense. Perhaps look for other investments?

Q: What’s the big picture: What sort of return would they get?

A: Here we’re into the realm of compound interest. If you take the average annual return of seven per cent, seen in the FTSE All Share Index over the last century, a single lump sum of £3,600 paid into a SIPP on your child’s first birthday would be worth £273,000 by the time they turn 65. Of course, you have to remember that past performance is not a guarantee of future returns.

Q: What would be the return if that sum was invested when they were 25?

A: It would only grow to £54,000, illustrating the benefits of investing at the earliest possible date!

Q: What happens when my child turns 18?

A: They assume the management of the Junior SIPP.

Q: Does that mean they can then withdraw the money and fritter it away?

A: No, don’t worry, unlike a Junior ISA, they cannot cash in the Junior SIPP. Under current pension rules they must wait until they are 55 to access the money.

Q: So, a Junior SIPP is not the answer in trying to build up a cash pot to pay for university fees?

A: No, it is a long-term investment to build up a nest egg for when they reach 55. If you want the money for university fees or to help them buy a home, speak to your financial adviser about other options.

To find out more about Junior SIPPS and other long-term investments for your children, call Innes Reid on 01244 347583 and speak to one of our independent financial advisers or email info@innesreid.co.uk

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