It’s fun keeping my brain attuned to other people’s pension problems for the Times. I’m glad I did this one with my friend Ros Altmann. Thanks to David Byers for this cerebral nutrition!
Tina Foxall, 51, a school exam invigilator from the West Midlands, wants to start investing £50 a month for her son, who is 15.
She has been so dismayed by the appalling interest rates on offer from high street savings accounts that she is considering ignoring them completely and simply starting a pension for him instead, but is not sure how to do it.
“Starting to save for him in a pension would give him an amazing start in life,” she says.
“But I don’t know how you start a pension for a child. What would be the most tax-efficient way of doing this?”
Tina would also like to know about any competitive tax-efficient savings accounts that she might have missed.
She is not willing to take great risks with her investment and would like anything she pays into to be covered by the Financial Services Compensation Scheme (FSCS) although she is interested in hearing about stock market options. She also wants an account that he could not touch until he is at least 18.
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With any pension, the money that you put in is boosted by the government. A Junior Sipp works exactly like a self-invested personal pension (Sipp). The holder, who must be under 18, can benefit from tax relief of 20 per cent on contributions. Parents or legal guardians can pay in up to £2,880 a year, which will be topped up by £720 from the government to a total contribution level of £3,600, says Henry Tapper, the founder of Age Wage, a pensions advisory service.
He believes that a pension may not be the most effective way to invest for a 15-year-old, given that he will be able to get the money only when he is 55. If Tina would like him to have access to it at 18, Tapper suggests a government-backed Junior Isa. The best rate is from Coventry Building Society, at 3.6 per cent — the ninth consecutive year that Coventry has topped the tables.
Junior Isas, just like the adult versions, are tax-free savings vehicles. Parents, grandparents and friends can put a total of £4,368 into a Junior Isa for a child each year.
As with adult Isas, the money can be invested in cash or stocks and shares, or both. You can hold only one of each type at any one time — one cash Junior Isa and one stocks and shares Junior Isa — but you can switch your account to a new company as often as you like. If an authorised investment company goes into default and is unable to pay claims against it, the FSCS will cover up to £50,000 of your investment. It will protect up to £85,000 held in a regulated savings account.
Baroness Altmann, a former pensions minister who is now a consultant, suggests that Tina could pay into a Lifetime Isa for her son once he turns 18. The government-backed products aim to encourage people under the age of 40 to save for a first home or retirement by offering a 25 per cent bonus (up to £1,000 a year) on anything saved. If you use the money before you are 60 for anything other than a first home worth up to £450,000, you have to pay a penalty that more than cancels out your bonus.
“A Lifetime Isa would gain an extra £12.50 for every £50 invested monthly — but the minimum age is 18,” she says.
There are also some relatively competitive interest rates elsewhere in the junior savings market. Halifax’s kids’ savers account pays 4.5 per cent, fixed for a year, on deposits of between £10 and £100 a month, but doesn’t allow withdrawals.
“Most children’s savings accounts have an upper age limit of 15, so if Tina wants to go for this option, she needs to open the account before his 16th birthday,” says Rebecca O’Connor from Royal London, an insurer.
“The rates on these accounts usually last a year before reducing down to less than 1 per cent. So she should then move the money to whichever is the highest paying account on the market to maximise interest payments.”
For an ultra-safe alternative, Baroness Altmann suggests Premium Bonds. “They pay no interest, but monthly prize draws give the chance to win £25 to £1 million,” she says. “Premium Bonds are completely guaranteed by the government, so they can be cashed in with confidence in the future. She can buy them online through the NS&I website, by phone or by post.”