The perfect Christmas gift for a child: a pension

Stephen Cameron
Financial Planning

Don’t be retiring when it comes to choosing a present for the children in your family, says Stephen Cameron of Lovewell Blake Financial Planning.

I once saw a study which showed that 36% of presents given to children on Christmas Day won’t be played with beyond Boxing Day, with the average child consigning four of their festive gifts to the toybox before the turkey is even cold.

That is a sobering thought for parents and grandparents who are still pondering what to buy their loved little ones this Christmas.  Even without taking into account the environmental implications of such waste, most of us would prefer the money we spend on presents to have a rather longer impact than that.

For those people, here is an unusual Christmas gift idea: why not buy your child or grandchild a pension?

Demographics mean that those born today will be facing an even more uncertain retirement than today’s generations.  Who knows what the state pension will look like in 70 years’ time, or even if it will exist in its current form?  Whatever happens, it seems certain that today’s children will need to be more self-sufficient in retirement than any generation in the last 150 years.

Hence the idea of gifting a pension.

Few people realise it, but parents and legal guardians can open a pension for a child from the moment of birth onwards.  Once it is set up, others – for example, grandparents – can contribute a maximum of £3,600 a year into it.  What’s more, that maximum contribution will actually only cost £2,880, because the taxman will make up the rest.

And here’s the thing: if you were to make that contribution every year for the first 18 years of a child’s life, it would create a pension pot which could well be worth hundreds of thousands of pounds by the time the child retires, even if they don’t contribute anything else to it in their lifetime.

What’s more, they can’t touch the money until they are 57 (under current legislation), so there can be no temptation to embark on the kind of reckless spending that, let’s face it, most of us would have undertaken had we received a significant windfall at the age of 18.

Often it is grandparents who have income or capital which is beyond their immediate needs, and many don’t want to wait until they die before passing it on to future generations. 

The good news is that they can give away up to £3,000 a year of their capital (more than the maximum £2,880 net contribution they can make to a grandchild’s pension).  Or this could be funded from surplus income every year, without creating any kind of inheritance tax liability; in fact it would reduce any inheritance tax liability that might otherwise exist.

Securing your child’s (or grandchild’s) future is the best present you can give them. Today’s young people are facing a financially uncertain world; building a foundation to support them in later life could be the best Christmas present ever.

If you have any questions

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