It is a little odd that when we attempt to teach our children about the necessities of life, we rarely go into great depth about the one thing that oils the machinery of our society: money. This maybe because (1) financial needs tend to be provided by the bank of Mum and Dad and (2) well…it’s a bit of a boring subject. And let’s face it – pensions in particular are a pretty complex subject that even adults often struggle with. But triggering an interest in money and pensions in a child at an early age could well set them up for the rest of their lives.
Childhood should be a magic time where, if lucky, needs are catered for and material solutions just seem to happen. But the fact is, as a child gets older, they soon find that money plays a part in almost everything they do and aspire for the future. Young minds soon realise that money is essential for sweets, footballs, holidays, gadgets and cool new fashions.
It all comes at a price. Not only that, but some of this lovely stuff can also be expensive. That means there is a need to save. Consequently – and this becomes apparent to the older child who is not just living in the present – the concept of saving for future needs is an essential activity. However, the concept of retirement does not have any real relevance to the mind of a young child. So, how can you begin to put over money management and future saving to your children?
Different age groups will be able to deal with specific concepts, but by making learning into a game makes it fun and rewarding. Playing shop can be a great way for a child to learn how money is used on a day-to-day basis.
Also, instead of just giving pocket money to very young children, you could introduce a system whereby they earn money for jobs done around the house. While looking forward to something they really desire, it becomes a part of their life and they begin to see how they must give to receive. They will also soon see that saving pennies can have a great benefit too.
This link from the Guardian offers thoughts about needs and mind-sets for each age group, and fun ways to teach your child.
In teaching a child about money you will be introducing concepts which will be valuable in later life. It links in with the three eras of their life: education, work and retirement. In order to have enough money for retirement, an individual needs to save throughout their working life. If a child understands the benefits of saving at an early age (i.e., they are not losing cash but preparing for future treats and needs), it can be made into a fun activity with cool rewards. When looking at the long-term, pensions and investments can be seen as tools which can bring about dreams and security.
Children, as every parent knows, change their perception of the world as they develop and grow. So, a child of seven may not be in a place to be motivated to understand the value of money. A teenager on the other hand, who is perhaps more materialistic and realistic as to what can be obtained through money (and is perhaps contemplating future education and work) will be ready to take on board how saving for the long-term future is a necessary action.
The earlier they begin saving for the retirement period is essential as it is dependent upon the amount of contributions they make.
There is no need to go into any complexity, but if a young person is going to save for their retirement in the most efficient way, they need to understand the basics of how it will offer rewards. It is useful to understand the three types of pensions: a pension from the government; a pension through work and a private pension. Let’s take one by one.
The state provides a retirement income when someone retires on the date set by the government. However, this income is not free. An individual pays towards it by making National Insurance Contributions (NIC) from their wages and salaries when working. These contributions are taken before they receive their regular wage. In other words, when they begin work, they will be contributing to a pension by default. However, the statutory pension is unlikely to be enough to cover all needs and dreams in retirement so further saving is needed through occupational and/or private pensions.
To encourage individuals to save further for their post-work years, the government in the UK has made it law that employers should provide an occupational pension for employees.
If the individual stays opted in (it is not mandatory), they will contribute to the pension through their wages at source. The employer has done all the leg work by choosing a pension provider and put all the processes in place. The employer will also contribute to the employee’s pension! But it is important the pension is monitored throughout their career to ensure it continues to perform well. If the employee understands the value of saving they are more likely to opt in and take it seriously.
The third type of pension is a private pension. This has nothing to do with work and can even be started in childhood. A parent can contribute to a private pension for a child who can take control of at it from the age of 18. The earlier you put money aside for retirement the better.
An adult chooses their own private provider and contributes to it out of their own income. A regulated financial adviser can offer support in finding the most appropriate fund. By taking out a private pension like this, an individual is adding to an overall pension pot.
Again, the individual should regularly monitor the fund’s performance to ensure that it is growing at an acceptable rate. People don’t have to have a private pension, but it can be a great way to bolster savings for retirement.
A private pension can also be accessed from the age of 55 because of the Pension Freedoms Act 2015. This can be a bonus to any savings strategy in later life, but it’s not suitable for everyone as it will leave you with less money in retirement. Therefore, it is recommended that before accessing your pension fund, you seek the guidance of a regulated financial adviser.
Children need to know how money impacts on their everyday life. As much as it is part of the school curriculum now, extra learning at home can be a great benefit. As well as understanding how the basic money exchange works, early learning can mean a child will foster the habit of saving for the future. For pensions and investment, this mindset is invaluable, and will allow children to prepare for a period in their life which may seem distant and unimportant.
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