How to give your child a financial head-start in adult life

What would your child say if you told them you’d set up a pension for them?

The chances are, not a lot!

And yet, if your child wants to go to university in a few years’ time, having a pension under their belt could be a massive boost for them and you.

We all know how expensive further education has become, which is why setting up a pension for your child sooner rather than later could make a big difference.

How?

To answer this, we should take a look at what today’s university students and graduates are up against financially.

On your marks

Let’s start with tuition fees.

In 1998, when fees were first introduced, a student had to pay up to £1,000 per year for tuition.1 Now, that figure has risen to up to £9,250 a year.2

So, it can cost a whopping £27,750 for a three-year course!

And like tuition fees, the cost of living has increased over the past two decades. As house prices in the UK have risen 5.1% annually to an average of £226,351, so have student rents.3

Now, the average rent that a student is expected to pay is £566 a month.4 With additional bills and combined costs of travel and socialising, it leaves little room for students to begin thinking about saving for a rainy day, let alone their future.

Making a head-start

This is where a pension can help.  

Saving into a pension for them means they are more likely to be able to focus on what’s in front of them at that moment, without having the added worry of finding the money to save for the future.

Although it may feel a long way off until they can get their hands on that pot, the rewards from starting your child’s pension early are hard to ignore.

The children’s pension can be started by a parent or guardian for any child under the age of 18 and offers tax relief on contributions, which is essentially free money!

The maximum contribution to a child pension with tax relief is £2,880 a year, and the tax relief available is 20%. This means that the government will top up a maximum contribution to £3,600 a year.5

Your child will also benefit from the power of compound interest. The earlier you save into the pension, the more your child will have for the future.

For example, if you saved £50 a month into a jar from the day they were born, by their 18th birthday, they would have £10,800.

Yet, if you saved £50 a month into a pension for them for the same length of time, with let’s say, 6% annual growth, they would have £19,461!*6

Not bad at all, right?

Get set, go!

The good news is, it doesn’t matter how big or small the contributions you make, if you make them regularly, it could make a bigger difference than you might think.

Particularly with something like a pension, where the tax breaks and compound interest could supercharge your child’s savings.

And with a sound financial platform already in place, psychologically they don’t have to get over the barrier of starting a pension from scratch later on in life, which means they are more likely to pick up the baton and contribute their own money.

Our recent research shows just how much of a role model parent are for their children when it comes to money.

Find out more in our release – Like father, like son

 

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Important Information

1 Tuition fees in the United Kingdom, online, Wikipedia, 13 August 2018

2 Undergraduate tuition fees and student loans, online, UCAS, 13 August 2018

3 What is the average house price in cities across the UK?, online, Metro, February 2018

4 High rent costs draining student maintenance loans, finds new research, online, Times Higher Education, 23 February 2018

5 Starting a pension for a child or grandchild could be a life-changing gift, online, The Telegraph, 11 August 2018

6 Compound Interest Calculator, online, The Money Jar, 16 August 2018

*£50 includes tax relief and does not take into account any pension changes.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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