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FOOL SCHOOL
The introduction of stakeholder pensions back in 2001 made investing for children even more appealing. Previously, you had to be earning money and paying tax to be able to benefit from having a pension. With stakeholder pensions, it is no longer be necessary to pay any tax in order to receive basic rate tax relief on money paid into these plans. Importantly, there is no lower age limit for making contributions. This means that you can make contributions for children. The critical issue is that even though a child may not be paying income tax they will be able to benefit from an income tax rebate into their stakeholder pension. This means that an investment of £100 into the stakeholder pension fund would actually cost you only £78. Some people use their Child Benefit and put this directly into a stakeholder pension. For the 2004/05 tax year, it is £16.50 a week for the first child and £11.05 a week for any subsequent child. This is equivalent to £1,110 a year for your first child (after you gross up for tax) and around £740 a year for your other children (again after grossing up for tax). All of this sounds very attractive, but of course there are potential problems: 1. Buying a stakeholder pension for your child means tying the money up until they are at least 55. What happens if disaster strikes and the money is needed for other uses before then? If it is a pension fund the money is not available -- of course, with the benefits of compounding, this may be a real benefit in disguise. 2. You have to buy an annuity with your pension pot. So, we don't have complete freedom to do what you want with the proceeds, unlike you would do with an ISA, for example. 3. We are looking a long way ahead. In 55 years a lot can happen, governments change, and regulations -- particularly apparent "loopholes" like this one -- get altered. It may be that the rules are tightened to take away the opportunity for this in the future. If they are, what would happen to the contributions already made? 4. What if the tax relief on pension contributions was removed? 5. What happens if the "fund" that you choose does not perform very well? Despite all these problems, a stakeholder pension is certainly one option worth considering. Bear in mind though, that it may be a very long time before your child appreciates the value of what you've done for them! Find out more in our Saving For Children centre.