There’s an interesting article over at the FT which talks about investing in a stakeholder pension for your children.
The article suggests that this can be one of the most cost-effective ways of saving for children, and a way which can really set them up in the future.
For example, if you were to invest the maximum amount into a stakeholder pension every year (£2808) from the child’s birth to the age of 18, and then left the money, assuming an average growth of 7% per year, the fund would reach £3.2million in today’s money, which they estimate would be worth £650,000 in real terms (i.e. with inflation taken into account). That’s a nice little sum, and of course doesn’t include any contributions the child might make themselves.
There are also benefits in terms of inheritance tax with gifted pension contributions.
One of the biggest benefits of paying into a pension for a child is the fact that they can’t get at the money until they reach the age of 55. Of course, this is also a big downside, as it means that the money cannot be used for other purposes, such as putting down a deposit for a house, or paying university tuition fees.
The amount of time the money stays invested means that the choice of fund can be pretty aggressive for a lengthy period, and of course the period also means there will be big benefits from compound interest.