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According to Virgin Money, more parents and grandparents than ever before are taking out pensions for their children to kick-start their retirement funds and maximise tax relief. In the last 12 months alone, one in ten of Virgin's personal pensions have been taken out for children, and half of those were for under-fives!
Each child has the same tax allowance as an adult, which means they can earn interest on savings or investments or receive an income of up to £5,035 in 2006-07 before they pay income tax.
Proper financial planning will allow you to take advantage of that tax allowance. Grandparents, or any other generous benefactor, may pay up to £2,808 every tax year into a pension plan on behalf of a child. The big plus is the tax advantage - for every £78 invested, the Government will contribute £22. Therefore, the Government tops up each year the £2,808 invested to £3,600.
"If this money was due to be passed on to relatives anyway when the grandparent dies, it also has the added bonus of reducing the amount the taxman may ultimately claim in inheritance tax," says Paul Ilott of Bates Investment Services.
Legal & General has calculated that grandparents could provide almost two thirds of a grandchild's pension by paying their pension contributions for just 18 years. For example, if a grandparent pays £100 per month (net) into their newborn grandchild's pension plan for 18 years, the projected fund after 47 years is £139,000 (in today's terms), which could provide a pension of £435 per month (in today's terms).
Read more: Why pension planning for toddlers makes sound financial sense
19 February 2007 © Moneyextra.com
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