Wouldn’t it be nice to know that you didn’t have to worry about financing your retirement? To think that your pension had been in hand since you were a child? It isn’t a feeling of security most of us have, but it is one, says the FT, that we might be able to offer our own children, or our grandchildren.
How? By paying into a Self Invested Personal Pension (Sipp) for them. You can put up to £3,600 into a pension for a child or grandchild every year. Children can claim basic tax relief, so that means making actual payments of only £2,880 a year. Do this from birth until she is 18, assume an annual return of 7%, and by the time she hits retirement age (55 for the purposes of this example), her fund should be worth £1,500,000 (in nominal terms, anyway), says the FT.
Cliff D’Arcy on Fool.co.uk offers an even more optimistic example. He plans to put the maximum into Sipps for his three-year-old for the next five years. Assuming a 9% return after charges, he points out that in 65 years’ time the pension pot could be worth over $4m. You can quibble with the assumptions (9% is surely pushing it rather), but this does, as he says, “neatly demonstrate the remarkable power of compound interest over time”. Even if he takes into account inflation at, say, 4%, his daughter’s pot will still be worth £390,150 in real terms (in return for a total contribution of only £15,000 or so). Not bad.
You can buy a Sipp for a child via the few organisations who have set up special child-friendly Sipps: Alliance Trust or European Pensions Management, for example. But you can also just use one of the many providers with no age restrictions on their Sipps. The Hargreaves Lansdown Vantage Sipp comes out in most surveys as being the cheapest, says D’Arcy: it has “no set up fees, no, or low, ongoing management fees, low share dealing commissions, and it also offers deep discounts on fund charges via the HL fund supermarket”.
Better still, this a good way for grandparents to take some of their estate out of the inheritance-tax net. If you make regular payments, says the FT (say, every month), you can claim them under “normal expenditure out of income” rules, making them exempt from inheritance tax. Sounds good doesn’t it?
Sadly, there is a catch. Over the next 50-60 years, we’ll have to put up with many different governments – three or four if we are lucky, ten plus if we are not. All will have a brilliant idea about improving pensions. All will need to find new ways of raising taxes. And most will, at best, be mildly incompetent. This makes it hard to think that the Sipp system will survive in its current form until our children’s retirement. So don’t just leave your grandchildren a Sipp they can’t access for 50 years. Hang on to a bit of ready cash for them too – just in case.