Recent figures from the Office of National Statistics (ONS) have shown that approximately a quarter of babies born this year are expected to celebrate their 100th birthday.
While we’ll often have plans for the future when we welcome a new baby into the family, perhaps saving for university fees or putting money aside to pay for driving lessons, we don’t tend to think financially beyond this. But as more children than ever before are set to reach the 100 birthday milestone, it’s time to think about how to prepare them for longer lives.
Life expectancy in the UK is changing. By 2066 residents over the age of 65 will make up over a quarter (26%) of the population, rising significantly from the current 18% representation. Of all the age brackets, it’s the over 85 segment that will grow the quickest. In mid-2016, there were 1.6 million people aged over 85, accounting for just 2% of the population, over the next 25 years, this will double. By 2066, there will be over 5.1 million people (7% of the population) that have celebrated their 85th birthday.
22.6% of boys and 28.3% of girls that will have 2018 birth-dates will see their age turn to triple-figures, but what does that mean for them financially?
Mapping out a newborn’s life is impossible, there’s no telling who they will be or what they will do with their time on Earth, but one thing is certain: they are likely to have a much longer retirement than previous generations and they are going to need money to support themselves through it.
The State Pension Age is gradually increasing, and there’s no predicting how old your children or grandchildren will be when they eventually reach it. As a result, it’s vital that we start thinking ahead financially and instilling the knowledge they need to be financially secure throughout the whole of their life.
But what extra costs do those born today need to factor in when financially planning for the future?
Perhaps the most obvious is an extended period in retirement. While the State Pension Age is likely to rise considerably before they reach it, it’s also reasonable to assume that their retirement years will be longer. As a result, building up pensions and assets that can be used to fund later years is going to become more important.
Furthermore, the cost of care will become increasingly important. The older we become the more we’ll need to rely on others and, with the social care system facing pressure, more of that financial burden is falling to individuals. Between 2009 and 2015 there was a 20% decrease in the number of people receiving domiciliary care funded by a local authority or a health and social care trust (HSCT). Therefore, the cost of care needs to be considered to a greater degree during the financial planning process.
With the introduction of auto-enrolment, Workplace Pensions will go some way toward providing an income when your child leaves work behind, but they won’t be eligible for one until they are 21, under current criteria. A review from the Department of Work and Pension also suggested that 12 million workers aren’t saving enough towards their retirement. With this in mind, planning for retirement is crucial.
What is the answer? Children’s pensions.
If you want to begin saving for your child’s or grandchild’s long-term future, a children’s pension may be the right solution for you. You can start saving in a children’s pension right away.
Each tax year, parents or grandparents can pay £2,880 into the pension, with the 20% tax relief taking the annual total to £3,600. If you continue to add the maximum throughout their childhood, they’ll end up with a sizeable sum to form the basis of their retirement savings, which they can add to during their working years.
Like regular pensions, children’s pensions come in different forms too. You can choose from a self-invested personal pension (SIPP), stakeholder pension, and another type depending on your appetite for risk and how much control you want.
One of the drawbacks of using a children’s pension is that the money will be tied up until the child is approaching pension age. Should they need the money at an earlier stage of their life, for example, when they want to buy their first home, it won’t be accessible. A children’s pension is a good option when you’re planning for your child’s later years but it won’t provide them with support before that.
Using junior ISAs
An alternative and more flexible option is using a junior ISA to build-up tax-free savings. You can open up a junior ISA savings account from when they’re born and continue putting money into it for 18 years. Each year you can add a maximum of £4,260 to the account, meaning you can put aside £76,680 aside for your child tax-free before they reach 18.
You can choose between a junior cash ISA, where the money will benefit from a defined amount of interest, or a junior stocks and shares ISA, where returns depend on the performances of the stocks or shares the money is invested in.
Once your child turns 18, the junior ISA will automatically become a standard ISA, allowing them to either use the money accumulated or continue making deposits themselves. One key point to remember here is that the money saved in a junior ISA doesn’t have to be used for retirement, it will be up to the child want they want to do with it.
Of course, you’re not forced to choose between a children’s pension and junior ISA, you can open up both in the name of your child, as well as using other savings accounts or trusts.
The future is unpredictable, for help and advice on anything concerning your financial future, or that of your loved ones, please get in touch with us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.