Secure your child’s financial future

I recently met up with a personal finance expert who asked me if I had yet set up a stakeholder pension for my small child. I haven’t. And what’s more, I don’t intend to.

I know that in theory it’s a good idea. Put the annual allowable amount of £3,600 gross into a pension every year for ten years for a child who is two now and it’s hard to see how they can’t have a happy retirement. So why aren’t I doing it for mine? Simple. She won’t be hitting retirement age for many decades to come and I just don’t trust the Goverment not to change the rules between now and then.

Why shouldn’t a hard-up chancellor struggling with the legacy of Gordon Brown’s overblown public spending policy suddenly decide that the under-21s can’t have pensions and claw back any gains? Who’s to say that the annuity system under which any tax gains we may have made on pensions, are then ripped from us by the financial services companies, won’t become more, not less, restrictive?

And given the paucity of fund choice when it comes to stakeholders, how can I know that in the end getting her one will be any better for her than simply drip-feeding money on her behalf into a soft commodities-based Exchange-Traded Fund (ETF)? I also wonder whether this passion for investing for our children via various Government-sponsored schemes (and in this I include child trust funds) really makes sense. My own pension is far from full enough (recent estimates from my Self Invested Personal Pension provider tell me I’m currently on track to get a pension of just under £3,000 a year), so surely I’m better filling that up than anything else?

Secure your own future first

The way I see it, the best way to secure your children’s future is first to secure your own. Most people of new parenting age are in debt (the average non-mortgage debt of the under-30s is around £7,000) and have as pathetic a pension as I do. To start squirreling money away in stakeholder pensions and child trust funds before you sort this is surely getting your priorities wrong. Will your children thank you for signing them up for a pension before they’re out of nappies if the end result is that they have to spend their 30s figuring out a way to pay for your nursing home fees, because you never got round to sorting out your own savings?

I doubt it. There’ll be no toddler stakeholders in my house. Savings are going to be all about the adults — at least until we own houses outright and have full pensions and Isas. That way, not only will our children never have to support us, but if they’re lucky (and one of Gordon’s successors is in a good mood), they may even inherit a bit too.

So while we’re on the topic of managing your own savings, there’s a few things you should be doing before the end of the tax year. I know it’s a few weeks away, but it’s worth being organised to make sure you take full advantage of the various tax allowances that work on a ‘use it or lose it’ basis.

Two things to do before April 5th

The most obvious one is your Isa allowance. If you haven’t put away £3,000 in a cash Isa yet, then it’s well worth doing that — the interest is paid tax free and in the current uncertain climate it’s more important than ever that you have an ‘emergency fund’ consisting of three to six months income put away somewhere safe and accessible.

You can also invest up to £7,000 in a stocks and shares Isa (less any money put into your cash Isa). Clearly, the stock market isn’t the cheeriest place to be invested at the moment, but you are allowed to hold cash in an equity Isa as long as you intend to use it for investing. Bear in mind that HM’s Revenue & Customers will still charge you 20% interest on any cash held in an equity Isa this way.

For basic rate taxpayers, it’s worth remembering that if you plan to make any pension contributions, best to do it before April 5th if possible. At that point, the basic rate of income tax will drop from 22% to 20% – it’s good news for your pay packet, but it also means that basic-rate tax relief on pensions will fall by the same amount. So if you do have a lump sum to put into your pension, do it now.

For more tips and advice, visit the personal finance pages of the MoneyWeek website – or check out Merryn’s new book, Love is Not Enough.