December 11 2013 Latest news:
Adam Aiken, Editor
Thursday, December 23, 2010
Pensions are just for older people, surely? Wrong. It’s never too early to start saving for your retirement.
"Pensions are a great way to save for your children’s future, especially as they are incentivised by the taxman. Every £80 you pay in is automatically topped up to £100, giving your child’s savings an immediate boost."
Saving for retirement is a hot topic that shows no sign of going away. With older people living longer, it is more important than ever to make your own provision for when you retire.
Whether it’s a case of making sure you have opted in to your employer’s occupational pension or taking out a private pension in order to supplement your state income in retirement, it’s crucial to take action early if you want to avoid living on a pittance during your twilight years.
The problem is that many people think it’s a problem that can be left for tomorrow – and as we all know, tomorrow never comes. Others take the view that whatever will be will be, and retirement is something that will look after itself if and when it ever arrives.
It’s hard enough persuading some adults to think about their retirement, so what hope is there for younger people?
Well, one answer is to drum the importance of pensions into our children – and it’s never too early to start. Although pensions are usually viewed as something for adults, there is no reason why saving can’t be started when our children are very young. That is what Tammy Parnell is doing for her daughters, Maya and Eleanor (pictured above).
Last year, Mrs Parnell, from Norfolk, took out pension plans for both girls, and she is saving £20 a month for each of them – something she will continue to do until they are 18.
Those relatively small amounts will quickly build up. Should the girls continue making similar contributions until they turn 65, they can each expect a pension pot that could pay them about £30,000 a year during retirement.
Of course, £30,000 will be worth a lot less in real terms in 65 years’ time – perhaps £5,000 or £6,000 in today’s terms – but Mrs Parnell’s case shows how a little bit of forward planning can have startling results.
And as the years tick by, it’s likely that Eleanor, four, and two-year-old Maya will be able to increase their monthly pension contributions significantly, boosting their retirement pots further.
“I came across the idea of starting a pension for children when they are very young from my financial adviser,” said Mrs Parnell.
“It turned out that he and his colleagues, and apparently a large number of other financial advisers, have begun pensions for their children at a very young age.
“Feeling that if it must be good for financial advisers it should be good for me, I found that even quite small contributions into a pension from when a child is very young can equate to quite large sums of money in the future.”
Mrs Parnell, a partner at law firm Clapham & Collinge, added:
“Most people taking up pensions don’t do so even when they are 18. They are more likely to begin when they are in their late 20s or early 30s. My children therefore will have about a 30-year advantage in respect of pensions.
“Pensions fall in and out of favour and many people have become disillusioned when their pension pots did not pay out what they were expecting. But this is a very long-term investment over probably 65-plus years and so should ride out the vagaries of the markets.”
Philip Cockrell, of independent financial advisers Investing Ethically, said the actions of Mrs Parnell and her husband Richard were symptomatic of a wider trend among parents and grandparents.
“Some of our clients benefit from quite generous final salary pensions, but with the demise of these schemes they are becoming concerned about how their children and grandchildren will cope when they come to retire,” he said.
“It is possible for parents and grandparents to set up and contribute to a stakeholder pension for children. The maximum contribution each tax year is £2,880, which the government increases to £3,600 once the 20pc tax relief is added.
“But a pension can be set up with as little as £16 net per month, which is probably more realistic for many parents and grandparents.”
A stakeholder pension is a personal pension that comes with built-in standards, including low charges and payment flexibility.
Andrew Edge, of Lovewell Blake Financial Planning, is another fan of pension saving for children.
“Government actuary estimations put life expectancy at 91 for a female born today,” he said.
“As we are living longer, it makes good sense to maximise your pension – and the earlier you start saving, the more money you’re likely to have.
“Pensions are a great way to save for your children’s future, especially as they are incentivised by the taxman.
“Every £80 you pay in is automatically topped up to £100, giving your child’s savings an immediate boost.
“Then there is the opportunity to benefit from a lifetime’s stock market growth – even with the ups and downs in recent times, the FTSE All Share Index is still more than 800pc higher than it was 25 years ago.
“This will give children a great head start on saving for their future, and could set them up for life when they retire.”
Mr Cockrell said the £30,000 a year estimate for the Parnell children was based on the pension fund achieving an average return of 7pc a year. As ever with investments, nothing is guaranteed. The income generated by a pension will depend on investment returns and annuity rates at the time of retirement.
But experts and advisers agree that it’s never too early to start saving for retirement – particularly given the tax breaks on pension contributions – and the sooner you start, the more comfortable you are likely to be in later life.