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2 Jun 2017

Ask an expert: 'I want to start a pension for my grandson - what are my options?'

How to save for a child's future - and how much they might need in retirement

Every week, Which?'s money experts answer your financial queries. You can submit your questions to money-letters@which.co.uk, or via our Facebook or Twitter pages.

Q. I've just retired, and having spent the last six months working out how much I need to live on, I've realised just how much is required to have a comfortable retirement. I've got a newborn grandson, and I worry he'll have no chance of enjoying the same kind of pension I have.

So, I want to give him a head start. Are there pensions for children? And how can I save into one?

Supplied via email.

Which? spends a lot of time trying to help people figure out how much they need to have a comfortable retirement - and the answer is several hundred thousand pounds.

Earlier this year, we attempted to answer the conundrum - how much is enough and, most importantly, how much do I need to put away. Analysing the spending data of thousands of retirees, we found that:

  • A couple needs £18,000 a year to cover the essentials
  • £26,000 a year is needed for a comfortable retirement
  • £39,000 a year is needed for a luxurious retirement

A comfortable retirement would require a pension pot of around £210,000 and a luxurious retirement would require a whopping £550,000.

A couple aged 20 would need to be savings between £131 and £342 a month, increasing every year with inflation, to hit those figures.

You can read more in our story.

Pensions for children

In answer to your question - you can indeed start a pension for your grandson, and they largely operate in the same way most defined contribution pensions, with a few caveats.

As your grandson is a non-taxpayer, he's limited to contributing a maximum of £2,880 a year into a pension.With tax relief at 20% added to these contributions, however, the total amount that could be built up for your grandson is £3,600 a year.

He won't be able to access the money until he's 57 (rising from 55 in 2028).

There are a couple of options available to you.

Many insurance companies offer 'stakeholder' pensions which are available for children. These come with a limited choice of investments in which to place your savings but the annual charges are capped at 1.5% for the first 10 years and then 1% thereafter.

Stakeholder pensions are a bit old hat these days, though. You'll get more choice from a child self-invested personal pension, or Sipp. These are offered by a few fund supermarkets - websites that allow you to trade funds, shares and other types of assets online.

Given the low amount you'll be investing in the pension, it may make sense to choose one that charges a percentage of the funds that you invest (between 0.15% and 0.5%). You'll pay fund charges on top.

Find out more about fund supermarkets and how much they charge.

How much could you save in a children's pension?

We've put together an illustrative example. Say you invest the maximum £2,880 a year, which works out to £240 a month. That's actually £300 a month with tax relief added.

If you invested that for the first 18 years of your grandson's life, and it grew by 4% a year after charges, he could end up with around £94,000 in his pension. Not a bad way to start.

If he then commits to saving once he's in the working world, he'll have a fighting chance of enjoying the comfortable retirement you've just planned for yourself.

Are there alternative ways to save for my grandson?

You could set up a Junior Isa, although he'll be able to access the money from age 18. You can save £4,128 into one of these tax free accounts, and have cash and stocks and shares options.

Grandparents can't open up a Junior Isa for their grandchildren - only parents or legal guardians can, so it's worth discussing how best to manage one with your children.

The other option is a bare trust, or designated account, in your grandson's name. He will still be able to access this at age 18, but there are no limits on how much you can invest.

But any profits you make in the trust could be subject to income, dividend or capital gains tax if they exceed the tax free allowances your grandson has (which are the same as adult allowances).

Find out more in our guide to tax on savings and investments.