Money help desk: Should children be given a pension for Christmas?

Published on Saturday 13 December 2008 13:02

IN YOUR article "Give a financial gift that will have a lasting impact" on December 7, when referring to gifts etc for young children, you did not seem to mention stakeholder pensions taken out by grandparents for grandchildren. Do you not think they are of use in this type of situation?

RG

Tom McPhail, head of pensions at Hargreaves Lansdown, writes:

BUYING a pension for a child or grandchild may not be everything they want for Christmas, but it can be an incredibly valuable gift. The first perk is the tax relief. For each 80 you put in, the Government adds 20 to the pension. You can put in up to a maximum of 2,880 each year, which the taxman will make up to 3,600. A word of caution here: the tax relief is notionally awarded to the child, so if you are a higher-rate taxpayer you don't collect the additional 20% tax relief you would on your own pension contributions.

A common misconception is that you can only buy a Stakeholder Pension for a child, but in fact you could buy a Personal Pension or a Sipp (Self Invested Personal Pension). In all cases you can do so from birth. Unlike most other gifts, they cannot squander it in their youth because, and this is the drawback, they cannot get their hands on the money until they are 55 years old. At that age they can take 25% of value as a tax-free lump sum and the rest will provide them with an annual income.

Unlike a later pension contribution made in their 40s for instance, the child benefits from the compound growth of more than four decades. By gifting the 3,600 to a child every year until they reach 18, even if they made no further contributions throughout their adult life, their pension fund would be worth 1.9m by the time they reached 65. Inflation would mean this would be worth less than it is now, however.

So these can be a good way of passing money from one generation to another, but the restrictions on access indicate that they are only suitable for children who are already comfortably provided for. Most need the money sooner, which is why Child Trust Funds, which can be unlocked on their 18th birthday, are more suitable for most.

Here the contributions are limited to 1,200 a year, but the fund does pass entirely into their ownership at 18 so you may have to persuade them to put it to the use you intended.

Will the Post Office deliver on savings?

I HAVE a fixed rate bond for one year, with seven months to run. This is with the Post Office, backed by the Bank of Ireland. Do you think this money is in a safe haven?

AT

Michelle Slade of Moneyfacts writes:

FIXED rate bonds can pay higher rates as the provider can guarantee they have your money for the agreed term. Access is usually not available.

However, the Irish government has offered 100% protection on deposits in selected Irish banks. One of the banks included in the scheme is Bank of Ireland, which funds the Post Office's savings in the UK.

Therefore your money should be perfectly safe, as long as the Irish government is able to meet its pledge.