Pensions for kids
If you really want to be sure your child will be mature enough not fritter away their money when they receive it, an alternative investment option open to children is a pension. Unlike other investments, they'll need to reach the ripe old age of 55 before they can tap into it. While the idea of setting up a pension for your child might sound a bit bizarre, if you have spare cash it can be a remarkably shrewd investment.
It's been possible to save into a pension on behalf of a child since 2001, when stakeholder pensions were introduced. These brought in new rules allowing you to save up to £3,600 a year into a pension, even if there are no earnings. And - as with all pension contributions - they are eligible for tax relief, so you only need to pay in £2,808 a year to get the maximum £3,600 contribution.
As well as receiving this tax relief top-up, the child's money also has plenty of time to grow, so just a small contribution can turn into a fairly chunky income when they retire. For example, according to figures from Legal & General, if you paid £20 a month in to a pension from birth until age 18, by the time they reached 65, this would give them an income, in today's terms, of £472 a month. Leave pension planning until age 30 and a monthly contribution of £204 would be required over 35 years to get the same income in retirement.
Weigh up your options
Although the introduction of stakeholder pensions permitted pension savings for children, you don't have to plump for a stakeholder to save for their retirement. "You can invest in any type of pension for a child - a stakeholder, personal pension or even a self invested personal pension (SIPP)," explains Anna Bowes, investments manager at AWD Chase de Vere.
There are differences between the three types. Stakeholder is the most basic, and while charges are capped at 1.5% a year (falling to 1% after 10 years) and there is a minimum contribution of as little as £20, they tend to have a more limited range of fund links than other plans.
Bowes recommends picking one from a large provider such as Legal & General or Standard Life, as they offer greater flexibility and investment choice. For example, with Legal & General's stakeholder plan you can pick from more than 20 of its own funds plus a further 17 from external fund managers such as Newton, SG Asset Management and JP Morgan.
Personal pensions offer a broader range of investment options but charges aren't capped. For instance, while Legal & General's stakeholder has a maximum annual charge of 1.5%, its personal pension charges up to 2.5% a year.
Beware of the SIPPs hype
SIPPs are another option. These offer the greatest flexibility of all, allowing you to invest in just about anything you want including shares, funds, gilts and even commercial property. However, Bowes says that few children would benefit from these more sophisticated vehicles. "Don't be tempted by the SIPP hype unless you are going to use all the flexibility they offer. Most of it can be achieved through stakeholder or personal pensions at a much lower cost."
And, although they offer a significant tax break and give your child a headstart on their retirement income, pensions aren't suitable in all cases. "When it comes to investments for children we do find pensions are the last planning option, tending to appeal to richer families who have put other strategies in place for more immediate requirements," says Bowes. "After all, while starting early is a good way to reduce the amount you need to save for retirement, at 18 most kids won't appreciate that they have to wait another 40 or so years to get their money."
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.