In my Money Confidence Gap Facebook community, I had lots of interest from parents about how to save for children. So I decided to run a Facebook live, “Junior ISAs and Junior Pensions.” Children’s pensions were the biggest area of interest and many parents weren’t aware that they could even set up a children’s pension. We should have learnt this at school!
Here is why you don’t need to spend hours and hours comparing pensions when helping your children to become mini millionaires.
Make your child a millionaire
Age UK conducted some research in 2017 and concluded that over 74% of people rely on state pension as their sole income in retirement. 7IM reported that the most popular way people rely on having a comfortable retirement is by….winning the lottery. Crazy!
I would love to give my boys the best start to their financial journey. What a great gift to give them in their 20’s. Rather than gifting them a pot of money at age 18, when let’s face it, they will just want to spend it on rock guitars and technology!
Emma Maslin, The Money Whisperer, wrote a blog last week about helping your child retire a millionaire, which inspired me. She explains the concept of investing just £1 per day from when they are born to age 20, with 7% growth and government tax relief, that by the age of 20, your children’s Pension could be worth £420,000 at age 65. That’s right – just £1 per day! £30 per month is bang on the amount of money I want to invest for my two boys. After my Facebook live, I was about to open a Hargreaves Lansdown pension (I had all the paperwork done) but then I decided to explore a little more into different pension options. So I began my search.
Choosing a Pension Fund
Let’s be honest…how often do you consider investing and then think, I have no idea what pensions are…it’s all gobbledygook! It reminded me of this Michael Macintyre sketch:
Choosing a pension is just like trying to pretend we understand the difference between red and white wine! As a financial expert, trust me when I say, this stuff is complicated! And I’m saying this with 17 years of experience! Fear in itself can cause delay or even complete avoidance of setting up a pension. So, I hope some of this information will help you.
As it’s a children’s pension, you are looking for a pension or a SIPP (self invested personal pension). Essentially they are the same thing. But think of a SIPP as a sexier version of a pension which allows greater investment choice. The Rolls Royce, the Brad Pitt. They can be more expensive but provide greater choice. The term ‘pension’ can be off putting for many investors. It is not the pension that is ‘bad’ or ‘risky’ it is what is invested inside the pension that will determine how much risk and how much return you’ll make.
Think of it, like two empty glasses. One has raspberries and one has blackberries. They are in the same glass. Don’t get hung up on whether it’s a personal pension, a SIPP or a stakeholder. They are in essence the same thing. It is what fruit you choose to add inside your glass that will determine the results, how risky it is and what you will get back. (Not sure if a raspberry is riskier than a blackberry but you get my gist!)
A lazy investor or an interfering one.
When choosing a pension, you need to consider what style of investment is right for you. I know that I wanted a low cost passive investment. Being a Financial Planner, I am fortunate to have years of experience of researching investments so was able to filter my options pretty easily. But we use research tools at work to help, which many don’t have access too.
Active funds are managed by professional fund managers who try and outperform the markets. It’s a little like planting a tree and hiring a gardener to water it, feed it and try to protect it from harms way. Trying to help it grow bigger and stronger by interfering. It is more costly as you have to pay the gardener and no guarantee it will grow better. But you hope with the best gardener in the world it might.
Passive funds are like planting a plant and leaving it to grow, uninterrupted. Letting nature take its course. Cheaper to maintain as you do not have to commit any of your time or anybody’s expertise.
Which is best? That really depends on who you ask! In my view, a blend of active and passive is useful, as with anything in life. Variation and diversification is key.
Along my travels, I’ve come across two fantastic easy to use tools that can help you assess how much risk you are comfortable with taking. Even though this is investing for your children’s future, it is still important to make sure that the road you choose is the right one. A smooth one with smaller potential returns or a rockier ride if you’re feeling a little riskier. Remember that you’re investing over a long long period of time as you’ll be investing for 20 odd years plus your child will then take over the plan and be invested until age 55 years old (which is the current minimum age you can access it from). Try these two tools:
Investment Platforms – What a minefield!
A further consideration is whether to invest directly with Pension provider or on a Platform. What on earth does that mean?
A platform is like a supermarket shelf. If Tesco were going to allow a supplier to hold their new products on its shelf, they may charge a fee for it. An investment platform is the same. It’s a charge to allow that company to hold your investment on its shelf.
Comparefundplatforms is a terrific FREE website to compare different platforms on the market. The other absolute must download is The Langcat’s 2015 Guide to Direct Platform Investing.
On compare fund platforms, I selected SIPPs and then entered the minimum amount of £50 per month just for comparison purposes.
The “final net value” shows you how the impact on charges make a difference on the performance. So the higher the number the better the potential return as the charges are lower. I then filtered down the top five and explored the providers websites to see what their minimum investment levels were. These are often in their ‘Key Feature Documents.’ I concluded:
- Cavendish have a minimum of £50 per month
- Close Brothers have no minimum
- BestInvest have a minimum of £100 per month
- Hargreaves Lansdown – Min £25 per month
- AJ Bell – No Minimum
Upon further inspection with Close brothers they don’t offer access to Vanguard so that leaves Hargreaves Lansdown and AJ Bell.
I googled “AJ Bell versus Hargreaves” and it came up with this website which did a cost comparison for me of costs and features. I also used the information from The Langcat’s publication (whilst quietly chuckling to myself at some of the writer Mark Pulsons’ humour). It was obvious from this that AJBell were the cheapest. Winner! I also used Boring Money and listened to Hollie Mackay’s video.
You could invest directly with a provider such as Royal London as an example. I’ve chosen to invest on a platform for two reasons. Firstly, I know Vanguard don’t offer a direct pension offering yet (I am told it’s on its way) and secondly a platform allows you to switch to another provider (normally free of charge a few times a year). So if I want to change investment strategy (which is likely over a 20 year period!) I can just perform a switch of funds rather than a switch of providers.
Don’t let the gobbledygook scare you
I did a little research on the impact platform fees can have (just to check if it was worth spending time comparing these shelves). The difference between AJ Bell and Hargreaves Lansdown worked out to be £294 difference over a 20 year period (based on a £30 per month investment assuming 6% per annum charge). So for a small investment, don’t over stress about who and where. If you, like me, are wanting to invest a small amount, my top tip
Don’t spend hours researching! Starting is better than not starting at all.
You can stop and start contributions
The beauty of pensions is that there is no minimum timeframe.
You can stop and start contributions as and when you need too. Essential with a family! The proof is in the pudding. Just get started.
If you want to improve your confidence with money, join The Money Confidence Gap Facebook community.
This article is not Financial Advice. It is just my experience of setting up a pension and sharing my fund selection. It is NOT an affiliation blog. Investments can go down as well as up and there is no guarantee that you will get back the amount originally invested. For recommendations specific for you and your circumstances, consider contacting a financial adviser. My earlier blog will help you with how to choose the right financial adviser.