Forget baby toys and teddies, a pension is what you should be getting your new baby

Pension Savings

The idea of a baby pension may not sit well with some of our readers. After all, babies are expensive, and it can be a big ask to squirrel away those pounds every week. However, if you can afford it, we still believe that baby pensions are a fantastic idea.

Through the miracle of compound interest, the earlier you get your baby pension started, the more value it will provide.

Can compound interest really make that much of a difference?

As it happens, yes, it can, and a big one!

Mums and Dads, Grandparent, Aunties, and Uncles can all help grow the pension pot by contributing to it with Christmas and birthday money, and inheritance as well if that happens to become available.

Regular savings accounts rarely grow in value, but the taxman can help you grow a pension by contributing 25% on top of every dollar you add.

Let’s do the sums:

£100 per month for 18 years = £21,600 in savings

Twenty-five percent extra contributions from the government bump that figure up to £27,000.

Let the pension fund do its thing until you’re 60, and compound interest at a modest 5% growth per annum will see the fund grow to £175,000.

That’s £153,400 for doing next to nothing.

The trick is to keep paying into the pension while you are working.

However, if you did nothing else and received the £175,000, you would earn a £43,750 lump sum, and a guaranteed taxable monthly income of around £725 for living expenses for 20 years. It gets even better when employee contributions are funnelled into the fund.

Rather than gift your child a large wad of cash for a wedding, University, or an inheritance, redirect it to a pension fund at the start of their life. Better yet, get it going even before their born. With compound interest, those extra few months of contributions can add up to quite a tidy sum at the end of 60 years.

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