View more on these topics

Children of the stakeholder revolution

Probably the most radical change included in the pension reforms that went live on April 6 is the fact that you no longer have to be earning to be able to take out a pension. This opens up whole new areas of pension marketing.

However, opinion seems to be divided in respect of one potential new market. Under the new regime, it is possible to take out a stakeholder or personal pension for a child. But will there be a market for pensions for children?

Some see this as a genuine business opportunity which combines tax advantages for the contributing parent or grandparent with a headstart in retirement planning as far as junior is concerned.

Others dismiss the idea as marketing hype and cannot take seriously the notion of a pension as a christening present.

I have to confess to being in the positive camp on this one. I do not for a minute pretend that the market will be huge but I do think there will be customers, particularly high-net-worth clients, who will be attracted by the tax advantages and want to start a retirement nest egg for the younger generation.

I freely admit that the average teenager would be more impressed to hear that granny had saved to buy him a car instead of a pension but children cannot be allowed to have it all their own way.

Consider some hard facts. DSS regulations permit third-party contracts. If the contract is for a minor child, it must be taken out by the legal guardian, which will almost always be a parent. Contributions may, however, be paid by grandparents, provided the guardian is aware of the contributions.

Contributions up to £3,600 a year can be paid into the contract, which is subject to the normal rules in terms of when benefits will be available and in what format. Contributions will be paid net of basic-rate tax as they would with any other individual contributions.

Growth in the fund is not classed as income belonging to either the parent or the contributing grandparent.

I am not an expert in inheritance tax issues but informed opinion suggests that making contributions for a child would not constitute a potentially exempt transfer for IHT purposes since the contributions are not falling into someone else&#39s estate. Contributions could, therefore, be a chargeable lifetime transfer.

However, the annual IHT exemption of £3,000 will prove very useful in this context. The maximum contribution which can be paid is £3,600 gross, which means that the net equivalent, after allowing for basic-rate tax relief, is £2,808. This is conveniently just below the £3,000 annual gift exemption.

Clearly, this could be an issue if the customer has more than one grandchild for whom they want to buy a pension. Perhaps granny will be able to persuade granddad to join in.

Consider the example of a personal pension given by granny as a christening present. Imagine also that the granny in question is extremely generous and contributes up to the £3,600 gross limit each year until junior goes to university at age 18. Based on a 7 per cent growth rate and 1 per cent annual charge, junior will have built up a fund of around £114,000 by age 18.

Compared with the pension fund of the average 18-year-old – which I suspect is closer to zero – this looks like an extremely attractive starter fund which he can later build on by making his own contributions.

Clearly, not all grandparents will go to these generous lengths but contributions made in this way do offer attractive tax breaks and grandparents can rest assured that funds will not be squandered at age 18 on a backpacking trip round South America.

The pension industry is continually telling customers they should start their pensions as early as possible. I am reminded of billboard ads that used to announce: “It is never too late to call your solicitor.” Surely, it is never too early to start your pension.


Henderson grooms new fund for stable

Henderson Global Investors has added the independent international portfolio trust to its fund of funds stable.This unit trust aims to deliver capital growth by investing in unit trusts and open-ended investment companies that have a global focus. Fixed interest securities can also be included in the portfolio.The independent international portfolio trust allows investors to access […]

The lone arranger

The mortgage market is still in the midst of a fierce battle and a further cut in interest rates has only served to heighten the competitive mood.The major players are jock-eying for position and assuming very different tactics but it was Nationwide&#39s radical stance which triggered the battle.CML communications manager Bernard Clarke says the focus […]

SocGen targets corporate bonds

SocGen Asset Management has entered the corporate bond fund market for the first time with the introduction of the SocGen sterling corporate bond unit trust.The unit trust will invest in a portfolio of between 40 and 50 corporate bonds issued by companies that are in the UK corporate bond sector. At least 80 per cent […]

Collins Stewart continues push for hedge funds

Collins Stewart’s range of Guernsey-based Hirzel House funds is growing with the introduction of the absolute return fund.A multi-manager fund of hedge funds, the absolute return fund is aimed at conservative investors who are new to the world of hedge funds, looking for a product that offers average returns for medium risk.The aim of the […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm