A pension is 'better' than traditional christening gifts

New parents should consider asking for a different kind of baby gift, and start a pension for their child, says Virgin Money.

The company which launched a stakeholder pension for children in October 2001 says a pension can allow contributions from as little as £1 a month with parents, grandparents, family and friends able to contribute up to £2808 each year and still have the pension qualify for basic rate tax relief.

Virgin Money says new parents receive on average around £660 in baby gifts ranging form pushchairs to clothes, while savings schemes such as Child Trust Funds (CTFs) are also popular.

But it claims families should start asking for pension contributions for their child, as a starting figure of £660 combined with a contribution of £75 per month for 20 years could provide a pension fund of around £618,000, depending on a 7% annual growth rate, if the child retires at 65, but doesn’t add any more contributions.

Although many parents are currently helping older children to get on the property ladder, Virgin Money predicts in the future more parents will want to help plan for their children’s retirement as in the last year 10% of Virgin’s stakeholder plans have been for children, with half of these for under 5’s.

But Virgin Money isn’t the only company which offers children’s pensions, as Legal & General also offer a stakeholder product, and have done so since stakeholder pensions came into effect in 2001.

Adrian Boulding, pensions strategy director at Legal & General, says he is a great fan of children’s pensions as it is "all about starting them off down the right road", and if they already have a pension plan by the time they become adults the children are more likely to continue contributing to it.

He says: “These are a smashing idea and I think they should be an ideal christening present, far better than the traditional silver spoon which normally gets thrown in a drawer, instead a pension sets up a godchild for life.”

Since stakeholders came into effect, Boulding estimates around 1% of all policies have been set up for children, as it was something initially encouraged by the government as stakeholders have no minimum age requirement and children under 15 are even issued with a temporary National Insurance number to allow them to build up pension contributions.

Boulding says: “Some of our first applicants were children, as it is wanting to give them a worthwhile present, while also making sure it will be held safe for them until they retire and not frittered away when they reach 18, which could be the case for other savings vehicles such as a CTF.”

And he says while children’s pensions might have gone off the boil a bit with the introduction of CTFs, it would be "quite nice to have the mix of the two", although he points out advice would be helpful in deciding the appropriate balance so the children still have some money to spend when they reach 18, but not all of it.

Meanwhile, Mike Morrison, pensions strategy director at Winterthur Life, says the idea of a child pension is not a new idea as it has been around for years, but it is generally a good idea and a possible way of avoiding IHT on a grandparent's pension.

He says: “For a lot of wealthy individuals, their tax planning could involve putting aside their own pension contributions as well as those for their grandchildren. It’s a way of taking money from a pension fund which could be subject to IHT if passed on through an Alternatively Secured Pension (ASP) and thereby avoiding the IHT trap.”

Morrison points out the biggest problem is where the money is invested and the type of returns it receives, but as it is spread over the long term he says even an index tracker pension, which can go up and down with the stock market, will have time to regain any losses it might incur to give a good start to a person’s pension.

Meanwhile, Virgin Money says they designed a children’s pension because it was something slightly different which would build towards people’s retirement, and since it was introduced it says it is seeing a growing number of people taking out the product.

Jason Wyer-Smith, from Virgin Money, says: “The thought of saving for a pension can fill a young person with dread so it’s great to be able to get your kids off to a flying start when they’re still in nappies.”

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email nyree.stewart@incisivemedia.com