In recent years, we’ve heard a lot about the gender pay gap, from salary to pension savings. But HMRC data reveals that the pension gap starts at a much younger age. Boys are more likely to have had a pension opened in their name before they turn 16 compared to girls. Thanks to the benefits of compound interest and tax relief, this could mean a significant pensions gap before children even apply for their first job.
There are restrictions on how much you can pay into children’s pensions. But even small contributions can make a big difference. As the contributions are typically invested, gaps can widen.
Figures obtained by Hargreaves Lansdown found 20,000 boys under 16 had money paid into a pension on their behalf in 2016/17. This compares to 13,000 girls. Whilst both figures are relatively low, it does highlight the gap.
Nathan Long, Senior Analyst at Hargreaves Lansdown, said: “Parent and grandparents are far more likely to save for boys than girls, so the gender pension gap can start from birth. While women’s paltry pension savings are rightly blamed on the gender pay gap and their greater role in looking after the family, there is another villain in the piece.
“It’s counter-intuitive that there are more pensions for boys as women earn less, take more career breaks, and yet have longer retirements, so need more in their pensions. It’s unclear why this discrepancy exists, although it could be because gifting has come in part from a generation of baby boomers where men are typically more likely to have the lion’s share of pension in retirement.”
So, should you consider paying into a pension for your child or grandchild?
How do children’s pensions work?
People that do not have any earnings can pay up to £2,880 per year into a pension, including children. Contributions will receive a 20% tax relief, boosting the pension further.
The restriction may seem like the savings will add up to little when you consider how much is needed for retirement. But, look at it over the long term, and the impact can be significant. Past research has indicated contributing the maximum annual amount each year could result in a £1 million pension.
According to AJ Bell, depositing the maximum £2,880 for the first 18 years of a child’s life would result in a £105,197 pot. This assumes a 20% tax relief is applied and a growth rate of 5% after fees. That’s a nice sum to hand over to your child. However, as it won’t be accessible, it has decades to grow. Leave it for another 46 years, until the child is 64, without making further contributions and it could have reached £1 million.
It’s a step that can help secure the financial future of your child and ease concerns.
There are three key reasons to consider paying into a child’s pension over alternatives:
- Tax relief: Pension contributions will receive tax relief at 20% if the person is receiving no other income, as is likely the case for children. It gives your contributions an instant boost.
- Compound growth: Pensions are a long-term investment product and, as a result, benefit from compound growth. This can help your contributions to grow significantly.
- Restrict access: Some alternative products will allow your children to take control at 16. However, with a pension you know they won’t be able to access it until retirement age.
Children’s pensions: The pitfalls
Whilst paying into a child’s pension can be an efficient way to save for the long term, it often isn’t the right solution. Pensions aren’t readily accessible and may mean they’re not suitable. Other products, for example, can help children or grandchildren through university or stepping onto the property ladder.
It’s important to fully explore the alternatives before choosing to pay into a pension. Other options may be better for your goals, including:
- Easy access savings account
- Cash Junior ISA
- Stocks and Shares Junior ISA
If you’re saving for a child’s future and want guidance, please get in touch. We’ll help you understand the different options and where contributions can be best used to secure their future.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.