In my blog for October I highlighted the benefits of saving on behalf of children from their early years to assist them in providing for their longer term futures. We are now seeing the challenges which many of the current generation of younger people are now facing as they enter the world of work in terms of pressures on wages, the rising costs of housing and the impact of repaying student loans to name but a few. The World Economic Forum predicts that the UK’s savings gap is set to grow by 4 per cent a year to reach £25 trillion by 2050.
In a new report published before Christmas, the government has proposed to extend its pensions automatic enrolment scheme to include younger workers.
Under auto-enrolment, employers in the UK are required to automatically enrol all eligible members of staff into a workplace pension scheme, and pay a minimum contribution into the fund. Employees do, however, have the right to opt out.
Currently, only those who are aged between 22 and the State Pension Age (SPA) are eligible to be automatically enrolled into a pension scheme.
Government ministers plan to reduce the lower age limit to 18 by the mid-2020s, in order to increase the eligible target group and get younger workers into ‘the habit of saving’.
Although this is indeed a welcome step in the right direction, the proposals have been labelled by some as “a missed opportunity” in so far as the longer term benefits which might otherwise be obtained for younger savers will be further delayed.
These proposals therefore serve to underline the important role which saving on behalf of children in the form of Junior Pensions can still have in helping to reduce the savings gap facing our children.
To confirm, the benefits offered by a Junior Pension plan are as follows:
You can open a pension for each of your children.
The government automatically refunds tax on savings of up to £2,880 per year, per child.
Other relatives (e.g. grandparents) can also contribute.
When your child turns 18 they become the owner of the pension, they can continue to contribute or leave the savings invested.
They can access the savings from age 55.
The plans can be taken out on behalf of a child from as early as the day after his/her birth. The child receives a tax relief top-up and benefits from the additional compounding effects of saving for longer. For example, just 3 years of contributions at the maximum £3,600 gross a year including tax relief could be worth over £210,000 after 50 years, assuming a growth rate of 6 per cent.
Julian Kaye
Dip PFS
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