Can I set up a pension for my child?

Stakeholder pensions or SIPPs (Self-invested pension plans) can be set up for children by parents and/or relatives.  The maximum amount that you can invest is £2,808 per year into this scheme, the government will top this up to £3,600 with basic rate tax relief.

The pension cannot, however, be set up in the name of the child. It has to be under the name of the parent / guardian. This is a long-term investment, and funds can't be touched by the child until they reach the age of 55.

There is no income or capital gains tax to pay. With a stakeholder pension, contributions can be stopped and started at will. Regular monthly amounts can be as low as £15.60.

SIPPs are more extensive and offer a number of more flexible options to the pension plan, but the same rules and amounts that apply to personal or stakeholder pensions apply.

It certainly is a great idea to start a child early on a pension scheme. Assuming the minimum is paid every month by the relative, and the child continues to pay £15.60 in each month from 18 to 60, the pot will be eventually worth around £120,000.

If the parent puts in £88 a month from the birth of the child, which becomes a gross monthly contribution of £110, at a 6 per cent growth rate this will be worth a whopping £1 million when the child turns 65.