Starting a pension for your children, or even grandchildren, may seem like a waste - a very long waste - of time. After all, they won't be able to access the cash until they are 57 if they were born after March 1973. In fact, as distant as a prospect as it may seem, setting up a self-invested personal pension (Sipp) could be one of the best investments you ever make on their behalf.
The main selling point is that because of tax relief you effectively get £720 extra a year for nothing. Contributing the maximum contribution of £2,880 a year for basic-rate taxpayers - or £240 a month per child, is worth £3,600 with tax relief added on.
Aim low
Yvonne Goodwin, an independent financial planner and founder of Yvonne Goodwin Wealth Management, says parents and grandparents should start with a low-cost Sipp. This is essentially a share dealing tax wrapper with the ability to invest in collective investments including unit trusts, open-ended investment companies (oeics), exchange traded funds, investment trusts, gilts and corporate bonds and cash.
Many low-cost Sipps will take regular contributions from as little as £25 a month but you will have more options if you can put aside at least £100 a month. However, there is no such thing as a completely free Sipp, and there are charges you will have to pay. So be prepared to compare children's Sipp providers.
According to Candid Money, which carries out regular reviews of the low-cost Sipp market, the cheapest providers as of October 2014 included Hargreaves Lansdown, Alliance Trust Savings, AJ Bell’s Youinvest, Fidelity’s Junior Sipp, Bestinvest, Interactive Investor, Charles Stanley, iWeb, Trustnet Direct and Strawberry Invest.
Justin Modray, the founder of Candid Money, explains that within these low-cost Sipps there was wide disparity between the cheaper and more expensive versions. He says: "The best value provider often varies depending on how much you have invested, the types of investment you hold and how often you will trade.
"It's also important to consider what type of service you will require, as Sipp providers and platforms range from no-frills bare-bones services to those who claim to offer plenty of customer support and back up."
What charges?
The most obvious charge is the annual fee. This is separate from the charges on any deals made within the Sipp wrapper. Not all providers will charge to set up the Sipp - Hargreaves, Bestinvest and Charles Stanley do it for free - but many others will charge upwards of £20 to in some cases £500. Some Sipp providers will offer free set-up costs if the parent also has a Sipp.
Other charges include dealing costs for buying and selling shares, some Sipp providers will also charge this for funds, too. Online share dealing fees will cost from £5.95 a trade, with the lowest fees restricted to frequent traders.
You will also come across fund charges and commission rebates. These are charged by the fund manager but the Sipp provider might rebate these. Annual charge or trail commission rebates will be worth looking out for as you will benefit for as long as you hold the fund. The Sipp might also charge a transfer penalty - so if you decide to move your Sipp to another provider, such as a full Sipp, you might want to take this into account.
Mr Modray says: "For regular savings of at least £100 a month and smaller pension portfolios Fidelity's Junior Sipp looks good value as there's simply a flat 0.35 per cent annual charge that covers everything except for underlying fund charges." In terms of investment choices, however, the Fidelity Junior Sipp is limited to offering open-ended funds - unit trusts, UK oeics and offshore funds.
Mr Modray also recommends iWeb and Interactive Investor as "very cost effective for mid to larger lump sum portfolios". Of the two, Interactive Investor offers investors more in the way of assistance and research.
Low-cost Sipp charges comparison
Figures assume 7 per cent annual growth before charges over 10 years
Assume £50,000 initial portfolio of five funds with two deals a year
| Platform | Value after 10 years | Total effective cost |
|---|---|---|
| iWeb | £96,874 | £1,483 |
| Halifax Sharedealing | £96,585 | £1,772 |
| Interactive Investor | £95,736 | £2,621 |
| Bestinvest | £95,635 | £2,722 |
| Close Brothers | £95,421 | £2,936 |
| Alliance Trust Savings | £95,209 | £3,148 |
| Fidelity | £95,187 | £3,170 |
| AJ Bell Youinvest | £94,803 | £3,554 |
| Charles Stanley Direct | £94,385 | £3,972 |
| Hargreaves Lansdown | £94,298 | £4,059 |
| Trustnet Direct | £94,238 | £4,119 |
| Strawberry | £93,796 | £4,561 |
Source: www.comparefundplatforms.com
Where to invest
Choosing your child's Sipp is only the beginning. Where to invest their nest egg will depend largely on how much risk you are prepared to take.
Ms Goodwin recommends a global tracker fund combined with some obvious shares, such as a selection of FTSE 100 companies. She says: "With pound cost averaging, even if you are only putting a small amount in each month, over the years the fund will grow."
Over the long term it is about achieving the right balance of cash, bonds and equities in your portfolio. Maike Currie, associate investment director at Fidelity Personal Investing, says: "There are many guidelines around what the ideal asset mix should look like. Some are linked to your age - for example: '100 minus your age should be the amount you allocate to equities'. If this is the case, the bulk of a young child's Sipp will be invested in equities." Given that a young child has a very long investment horizon ahead of them, this makes sense. They can afford to take on more risk as their investment will be able to ride the ups and downs of the market without worrying too much about the short-term volatility.
"History also shows that over the very long run returns on equities have generally outperformed those on cash, bonds and property."
Ms Currie recommends the BNY Mellon Long Term Global Equity Fund (GB00B2423L71). The fund has a very long-term focus, investing in companies that the managers believe can generate wealth for shareholders.
Recommendations are one thing; Mr Modray says there is little point in taking out a Sipp if you do not intend to carry out your own research. He says: "Choose your investments carefully, ensure they're appropriate for what you're trying to achieve and keep an eye on them in the future. Ms Goodwin agrees: "Whether it's for yourself or for your child or even your grandchild, if you have a Sipp you need to spend the time managing it, and making sure your money is working hard."
And when you have build up a sizeable fund that is when the fun can really start.
Ms Goodwin says: "When you have more than £50,000 you can start thinking big and transfer the money to a full Sipp which allows loans for commercial property. Think of the possibilities, your child or grandchild can in theory access the money before they retire if they have a business and need to buy property for it. Then it gets paid back with interest."
So just think, the pension you started could help them become the next Richard Branson or Alan Sugar. Well, maybe.
