Child Pension Contributions: the Power of Compounding

This week is National Pension Awareness Week, so we asked Roy Coulson, Head of Proposition, to give us his thoughts on how important child pension contributions are, despite being often overlooked, and how they can prove pivotal to that child’s life later on.

Two of my good friends each had a baby yesterday.

One of the couples had a boy and the other a girl. It’ll be an expensive time of year when I have to start buying the little ones’ birthday gifts!

It’s absolutely wonderful when your friends are able to share such joy and elation with you, especially against a backdrop of a very busy and intense world.

With each of my friends telling their stories, it made me think how well prepared they needed to be in order to bring new life into the world. By which I mean: as prepared as they can be. They’ll have the clothes, furniture and plenty of books about raising a child; but there’ll still be a shock with the sleepless nights and adjusting to life post-baby.

It was this preparedness that got me thinking. We do so much in bringing children into the world, raising them to adults and preparing them for their own lives, but the world will continue to challenge us. If the aim of life is to lead a joyous one, can we prepare for that? How can child pension contributions help?

Working in lifestyle financial planning means I think in this way:

True financial planning is helping people lead the very best lives they can, removing stresses and helping to achieve life goals; helping people with the here and now, but preparing them for the future.

What can we do to help brand-new life in their journey?

Simplicity is key. Preparing where you can is key. Saving a little can make such a huge difference.

My aim here is not to sell anything, but to raise awareness on simplicity and preparation.

If these new parents began saving for their children now, these children would have such a kick start in their futures just through the power of simplicity and preparation.

To bring this to life:

If today the parents of grandparents put £240 per month into a pension, this would be increased to £300 by the government through tax relief. That is saving £3,600 per year.

If this saving was done for just 10 years, that would be £36,000 saved for these children.

And if that had been invested, and earned perhaps a modest 5% per annum, by the power of compounding this would be £45,280 at 10 years old.

If that pension was never added to again but continued to be invested to earn 5% per year, that child at the age of 65 would have £662,701!

That figure is huge compared to where it has come from. This is why it’s so important we prepare financially as much as we can right at the outset, rather than when the child hits a certain age, or when we reach retirement age.

What is Tax Relief?

When you pay into your pension, some of the funds that would have gone to the government as tax goes towards your pension instead as a separate top up. This can help reduce the amount of tax you pay and be used to help boost your savings for the future.

As an example, if you pay £80 towards your pension, the Government will top up your pension with another £20 to boost your pensions savings by a total of £100.

In life there is so much we prepare for, and yet so much that will come at us all that we simply can’t anticipate.

But by planning and careful consideration, we can put ourselves and our families in the best positions to deal with such events.

If you’d like to consider setting up a fund for your grandchildren or would like to find out more about child pension contributions, contact us to arrange a meeting with one of our planners.

Customers should be aware commissions, fees and other charges will have an effect on gross performance. Forecasts are not a reliable indicator of future performance. Capital is at risk.