Three reasons why pensions are better than Junior Isas for your kids

Jamie Smith
2 January 2019

If you are a parent, or grandparent, and are worried about how your children or grandchildren’s financial future will pan out, why not do something about it?

A person on the UK average salary of £27,000 now needs to build up a pension pot of over £300,000 to be able to maintain this level of income in retirement, new analysis has shown from Aegon UK.

But the size of the average pension pot in the UK remains around a sixth of the size of this recommendation, at just £49,9881, according to research published by Aegon in its Retirement Readiness Report 2017.

In a world where the onus of ensuring financial security in retirement has very much moved from the employer to the individual, it is never too early to start the process of saving for your children’s future.

Of course, there are a number of ways that you could look to do this, a popular route being a Junior Isa (Jisa). However, we believe there are many reasons why a pension could be a better route.

Not only does a pension give the money more time to grow, putting your child one step ahead, but by involving them in retirement saving from such a young age they should be more engaged and have a better understanding when it comes to looking after their own financial and retirement planning.

This decision to start saving now could end up being one of the greatest financial gifts you ever give. Here are three reasons why:

  1. Tax relief: the first big advantage is the generous tax relief on the pension contributions your child will get even though they don’t earn an income.

    Every child is eligible for a pension from the day they are born. It is taken out in the child’s name and anyone can contribute, including parents, grandparents and other relatives.

    The government will give 20% tax relief up to a maximum of £2,880 per year. So if you contribute £2,880, it’ll be topped up to £3,600.
  2. Benefit from investment growth: If you invested the £2,880 a year contribution for 18 years, assuming an average net growth rate of 5%, your child would have £68,181 in their pension (in today’s money and assuming an inflation rate of 2.5% per year).

    What’s more, when left invested for 50 years (by which time your child will be 68), without them adding another penny to it when they were old enough to, and still assuming the annual net growth rate of 5% each year, the pension would be worth £227,478 again in today’s money.
  3. Limited access to their pension until they retire: A child pension is also appealing if you want to save for your child but you’re concerned about how they might use the money. Junior Isas, a popular choice when saving for children, gives children access to their money at age 18, when it becomes a standard Isa.

By investing in a child’s pension, you can live safe in the knowledge that your child isn’t going to splash out on a fancy car or a round-the-world trip with their savings the moment they hit adulthood. They just might when they reach retirement!

One drawback is that it’s pretty much inevitable that pension rules will change between now and your child’s retirement. The age and way they will be able to access their pension could change, but the pension pot that’s built up should still be significant and one you should absolutely consider given the relatively low initial cost.

As with any financial matter it’s always better to seek advice before making a decision.

Jamie Smith is a partner at financial advice firm Foster Denovo.

1. Aegon UK Readiness Report, April 2017, pg. 6.