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Parents encouraged to make pension pots for children

Parents encouraged to make pension pots for children

Parents have been encouraged to help their children plan for later in life by making contributions into pension fund as soon as the child is born.

Pension specialist Retirement Advantage calculated that parents and relatives investing £100 per month on behalf of a child from birth to age 18 could create a pension pot worth £284,316 by the time the child is 67.

The calculations were based on average investment growth of 4 per cent net of charges, with total contributions of £27,000 after consideration of tax relief.

Someone who started saving at age 30 would have to contribute £214 per month to attain the same savings, or £372 per month for a 40 year old.

Andrew Tully, pensions technical director at Retirement Advantage, called pension contributions one of the “best gifts” that relatives could give children.

“Not only do you hopefully create a savings habit early on, but the pension contributions are helped by the effects of compounding interest. Over time, you receive interest on the interest and this can be one of the most powerful forces in finance,” Mr Tully said.

Parents and relatives can save up to £2,880 per year on behalf of a child, with the government topping that up to £3,600 through tax relief.

Martin Bamford, managing director at Informed Choice, said that affordability and accessibility are often barriers for parents looking to make pension contributions for their children.

Competing financial priorities often make affordability an issue for parents, and lack of access to the pension pot until age 55 means that this money cannot be used for other means until that time.

This could make a Junior Isa more appealing, but ease of access could make parents concerned that their children might “blow the lot” once they turn 18.

“This is one of those scenarios which looks great on paper but often comes up against practical stumbling blocks,” Mr Bamford said.

julia.faurschou@ft.com

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