Pension or ISA when saving for kids

[itsallgoodfunreally]

Hi, we are fortunate enough to be finishing paying off our mortgage soon - hurrah!!!!!

This will mean we have about 1.5k extra a month which we are not used to having, and rather than get used to having it I am keen to start saving that to help my 3 kids with house deposit etc. My question is whether I should invest this in an ISA for them each or out into my pension and give them money from a lump sum in about 10 years.

I pay 40% tax so Pension seems wisest in that respect , and I am 53 so will get access to it in a few years.

Same time though I like having the money more clearly ringfenced as theirs - so I can hand it to them . They are 10-14 , but dont want them to use it before they are 25 ( unless for a really good reason) so happy to lock away.

Any advice greatly received! I have never had this much extra income before .

I'd do the pension because of the tax relief, its worth a lot, but do it in a private one where you have more control over what age you take it at (currently min age is 55, but will be 57 from April 28).

Yes, I was thinking Pension was the best option due to the tax relief when investing and also ability to remove a lump sum tax free .

Just my heart says it would be nice to have something in their names so they can see we have saved it for them.explicitly. Maybe the answer to this is to open a new private pension as opposed to add to my existing one 🤔

Why not set up pensions for them? Even as a non-earner they can each put in £3,600 gross a year - £2880 if your money and 20% tax relief of £720 from the tax man.

That way it's ring-fenced, it won't be considered for benefits eligibility, and it will have 50-odd years of compounded growth which will be game-changing for them.

But they won't be able to use it as a house deposit and will get the money when they are 60+ and most likely financially stable

Because then they can't use it as a house deposit which is OP's intention for the money.

I would be loath to put significant sums of money in the name of a young person tbh. Everyone expects their child to turn into a sensible young adult, but some take longer to mature than others and may come to regret the financial choices they made in their late teens/early twenties. I've known one family where the lot got blown and it caused a lot of upset.

Why not both?

OP will have an extra £18,000 a year - the maximum post-tax SIPP contribution for three non-earning children is going to be less than half of that.

I am maxing out my two DCs SIPPs and then any surplus goes into ISAs in their names. Rough figures: at a growth rate of 7.2% (which is below the long term average return in the stock market) an investment will double every ten years. The £2880 OP can put in a pension for each child this year will be worth about £115k in fifty years.

The economics of buying a house may well be very different in 15 or 20 years. It's not just house prices - secure employment is going to be much rarer and buying property may not work for everyone.

The economics of funding a retirement will change too - but they will simply get worse.

Op this forum is full of parents and grand parents complaining that money has been wasted when it was meant for a deposit etc.

the most sensible way forward is to use the lot to over pay your pensions between now and then for the tax relief and also for the tax free lump sum. Then you put your X% house deposit tax free lump sum into an account you can control to protect it until the right time.

The first thing to understand is that you cannot restrict their access to it when they turn 18 unless it is in your name. Why do they need to see it in their name (unless your own ISAs are maxed out?). Your heart could lead you into a serious mistake here - how would you feel if they spent it all in a year?

Given your age I would pay it into my pension (unless you already have enough saved). If my pension was at risk of having too much in it I would save it in a S&S isa in my name and give it to the kids when they need it.

No way would I risk my hard earned cash being spunked on the sort of things I know 18 year old me would have spent it on!

Thanks all, Pensions it is then!
I am absolutely sure I dont want to give it to them at 18- I know it will go on holidays and clothing!
Was thinking 25 would be a good time and if they still blow it at that age then it will just mean I have raised irresponsible kids!! Thanks all

We are going the pension route and planning to withdraw lump sum to pay for house deposits for the kids. It’s the most tax efficient. Then we just have to survive 7 years to outlive the taper relief and the gift will be good!

Pension all day long

While putting it in your pension might seem like a no-brainer, you need to model some scenarios of the tax you will pay when you withdraw it.

You can take out inheritance tax insurance for that scenario. If you are under 60 it is quite cheap.

I would also advise that when the time comes don't just hand over a lump sum of money because they could literally spend it on anything. My friend had saved a small amount to put toward her DD's wedding and a larger amount for a house deposit, you can see where this is going. Because her DD got engaged and started planning the wedding my friend handed over the entire pot of money. They were looking at houses as a wedding takes 18 months plus to plan usually.

The whole amount was spent on the wedding, they are still in rented 6 years later having never saved up enough money to get on the property ladder.

Meanwhile her younger sister bought her first house 2 years ago having declared a one day party (wedding) a complete waste of money, had a teeny wedding, no frills, very happy bride and groom and now have a gorgeous house.

It's a bit more complex than this.

At the moment, in normal circumstances for DC pension schemes an individual can withdraw a lump sum up to 25% of the value of the pot, up to a cap of £268,275, tax free. However, if any more than 25% is taken as a lump sum then it's taxed as income, and it usually triggers restrictions on the amount you can continue to pay into the pension.

However, the big unknown is whether or not the current tax treatment will remain unchanged. Ever since the Labour government came to power there have been rumours in the run up to the Budget that Rachel Reeves will make changes; she's already changed IHT treatment of pensions, torpedoed QNUPSes, and it's a brave person who bets against her not being able to help herself with the tax treatment of lump sums as is constantly rumoured. After all, everyone wants wealth taxes on the rich, don't they?

Yes, the removal of the tax free withdrawal was one of the things that worried me tbh. However, even if I was taxed on this at withdrawal, it would have grown more becomes of the tax free investment - so guess still better than taking putting it in an ISA.

I’d agree with this. I am saving in a JISA for my kids, but only because I’ve already put enough in my pension for it not to be tax efficient anymore. I am nervous though that they’ll get access to it at 18. My plan is to either say it’s for uni costs or say that I will continue paying into it until they’re late 20s if they agree to use it for house deposit, but neither is fail safe!

In the same situation I split the contributions for each DC between a SIPP and a junior/lifetime ISA (depending on age of DC).

For those who were adults already, just to share the opposite view - they’ve been almost scared of doing anything with the ISA money they could access because they knew its value. Don’t assume they all will just spend without thought!