How grandparents can make their grandchild a millionaire
According to data produced by Skandia, if grandparents put just £240 a month (which equates to £300 a month gross contribution) into a pension for a grandchild, each year for 18 years, when the grandchild reaches age 60 they could be a millionaire.
This is based on 6.5% investment growth p.a. and no further contributions being made by the child. The child can of course make further contributions when they start work to create an even bigger pension fund.
From the moment a child is born, they are eligible to receive contributions of up to £3,600 into a pension each year. Anyone is able to make the contribution on behalf of the child. Unlike other investments options, such as a junior ISA, a pension can provide basic level tax relief, even for a child who is not working, making it an extremely attractive long term savings option. On an annual contribution of £3,600, £2,880 is paid by the grandparent and £720 is paid by the government into the pension in the form of tax relief.
The money is however locked away until the grandchild reaches at least age 55, yet this isn't necessarily a bad thing. Children born today are unlikely to enjoy the same level of retirement income funding that the current level of baby boomers are enjoying. They will need to be more self-reliant as dependence on the state is likely to diminish, and company perks such as final salary pension schemes disappear.
However, the younger generation do not always understand the need to save for retirement, and many cannot afford to. It is not until someone approaches retirement, and they are faced with a finite income until they die, that they wished they had saved more. Those in retirement are best placed to pass this wisdom onto the younger generation, and opening a pension for them is a good way of ensuring their long term financial future.
If the grandparents plan to leave some of their estate to their grandchildren, and they have surplus income from their own pension income, this is an extremely tax efficient way of passing money to them. If the surplus income is available from an income withdrawal arrangement it will take money out of a 55% death tax charge environment. If the surplus income is created from an annuity payment, the contribution to the grandchild's pension takes the money out of their estate.
Once the contribution is made into the child's pension, the future investment growth of those contributions belongs to the child, creating significant longer term value compared to if the money had remained within the grandparent's estate. The income tax paid by the grandparents on the pension income can in part or whole be offset by the income tax relief boost the child receives on the contribution made.
Adrian Walker, Skandia's pension expert, comments: "If a grandparent has surplus pension income then this can be a wasted opportunity from an estate and tax planning perspective. By opening a pension for their grandchild, they can significantly improve the amount their grandchild eventually inherits. Although the money is essentially locked away until the grandchild reaches age 55, once they do have access to the money, it can significantly boost their lifestyle, such as paying off their mortgage and providing a substantial income in retirement, something which will become essential as state support reduces."