Money expert Martin Lewis has issued a pension warning to anyone under 18 – or their parents or grandparents saving for their future.
Martin this week returned with another hotly anticipated instalment of his The Martin Lewis Podcast on BBC Sounds and Spotify.
The money maestro turned his attention to savings for children – but issued a warning over a type of pension you can set up for your offspring.
Effectively, though you can choose between a traditional savings account, a Junior ISA or even a children’s pension for your son or daughter.
Martin Lewis was asked the best way to save for children – a children’s pension or an ISA.
Martin told them: “Well it depends on what is the best wrapper for the underlying investment.
“There are Junior ISAs that you can put money in each year, and generally it will be the parent putting money in. The advantage of putting money in a Junior ISA because most kids don’t pay tax is that if parents don’t give enough money to generate £100 of interest a year then if it’s outside an ISA, then that is taxed at the parents’ marginal tax rate.
“So putting it in a junior ISA means a parent can give more money and the child won’t be paying any interest.”
But the difference with a pension is that the child gets tax relief on money put in, giving a 20 percent boost up front, but the money isn’t accessible for another 33 years.
Martin added: “Whereas in a pension they actually get tax relief when you put it in, so you can put £3,600 a year into a pension for a child, they’re getting whatever the tax relief is, so it’ll cost you around £2,700, to put the £3,600 in because of the tax relief that they get, as if they were a basic 20 percent taxpayer.
“So a pension for a child is very lucrative. But of course you put money in a pension and it’s locked away without them being able to use it until they’re aged 55, you put it in a junior ISA and they can use it when they turn 18.”
Martin concluded that an ISA is still a better option than a child’s pension if you haven’t maxed out your savings and Junior ISA allowances.
He said: “So even though the pension is arguably more lucrative than the ISA… I still think you want that liquidity of your child may want access to their money when they’re 18 rather than wait til they’re 55.
“Those who have enough money to fill up their savings and an ISA can then look at putting into a pension for their child but I’d probably do the ISA before the pension for your child.”
