A children’s pension may seem a somewhat contradictory term, but from the minute they’re born, you can start saving for your children’s or grandchildren’s retirement.
Starting a pension for a young child could be one of the most effective ways to begin preparing for their financial future.
For them, it can mean having the reassurance of a pension pot that’s grown substantially over the years. Meanwhile, if you’re contributing, it can be a good way to reduce the size of your estate and, in turn, a potential Inheritance Tax (IHT) liability.
Read on to discover three interesting benefits that could result from paying into a children’s pension.
Children’s pensions are growing in popularity as long-term investments designed specifically for the child’s retirement
A children’s pension is usually in the form of a junior self-invested personal pension (SIPP). Typically, the child won’t be able to access the funds until they reach the minimum pension age, which will be 57 from 2028 – this could rise further by the time they come to access the savings.
Although there is a wide range of savings products available for children, the popularity of pensions for young people is on the rise.
According to Which?, the most recent data shows that total contributions for under-18s rose to £79.6 million in the year to April 2023, up from £75.9 million the previous year. The number of young pension savers also rose from 42,000 to 45,000 over the same period.
While a children’s pension can only be set up by their parents or guardians, once started, anyone can contribute, including grandparents.
Children’s pensions can be boosted by tax relief, long-term growth, and compound interest, and could even help with your own estate planning
Paying into your grandchildren’s retirement savings could be a wonderful gift for them, coming with various potential benefits.
1. Your contributions are boosted by tax relief
Just like adult pensions, junior pensions are eligible for tax relief. Assuming the child has no earnings, you can contribute up to £2,880 per year for each child, with the government adding basic-rate tax relief to take this total to £3,600.
Even though the vast majority of children have no earnings, tax relief is still applied, making this a unique way for them to receive tax relief without any employment income.
Plus, your already-generous contribution will be boosted even further.
2. Compound interest and long-term growth could increase the pension pot substantially
A pension started when the child is age seven will have at least 50 years to grow, which is one of the biggest benefits of this type of investment.
This is because the longer an investment has to grow, the more it can benefit from the power of compounding.
Think of it as a snowball effect for money. What’s saved and invested in the first year will attract interest and generate returns. Then, in the second year, the original invested sum will hopefully do the same, plus the interest and returns from year one.
Essentially, this growth on growth can help to boost the pension pot a little more year on year.
Long-term growth is also a key factor. The nature of a children’s pension means that, by definition, it has the luxury of time to help augment initial investments.
For example, if £3,600 is invested each year from birth until the age of 18, with no further contributions, MoneySavingExpert suggests the pension pot at age 57 could be worth:
- £105,000 with 1% annual growth
- £275,000 with 3% annual growth
- £715,000 with 5% annual growth
- £1,830,000 with 7% annual growth.
While investment returns are never guaranteed, this is a significant sum for the child to carry into their retirement. That’s before they’ve even started work or earned a penny of their own, too.
3. Contributions could potentially be outside the scope of Inheritance Tax
Contributing to a children’s pension could also help with your own estate planning. In 2025/26, you can gift up to the annual gifting exemption (£3,000) and this amount will immediately fall outside your estate for IHT purposes. So, putting this into a children’s pension could be a win-win situation.
Alternatively, if you regularly pay into the children’s pension from surplus income, you could gift an unlimited amount and have it immediately fall outside your estate. As long as these contributions are made regularly, from your usual income, and don’t impact your standard of living, this could offer another way of gifting to a child’s pension while reducing an IHT bill.
Talk to us about what contributions you can make to potentially reduce your IHT liability.
Consider whether a children’s pension is the right place to offer your support
Although there may be these potential benefits, there are a few considerations you might like to take into account before committing to contributing to a children’s pension.
Are your own finances in good shape?
While saving into a child’s pension can be an effective way to pass your wealth on to your loved ones, you need to make sure your own pension contributions are fit for purpose.
Include contributions for your grandchildren as part of your entire financial strategy, ensuring that you have enough security in place for your own retirement first.
Would you rather these funds be accessible?
You can start a pension for your own children, but your grandchildren’s will be at the discretion of their own parents. If they do set one up, you may still want to consider whether this is how you’d like your own contributions to be used.
This is a long-term investment that can’t be accessed until much later in life, so realistically, you might not see your grandchildren enjoying your generosity.
If you’d rather gift them money they can use while you’re still alive, you may want to consider asking their parents to set up a savings account or a Junior ISA, which are usually much more readily accessible.
Get in touch
A children’s pension plan can be a tax-efficient, long-term investment that all the family can contribute to, giving the child the gift of reassurance when they reach retirement.
If you’d like to talk to us about starting a pension for a child or how you could benefit from making contributions into one, we’ll always be happy to help. Email hello@intelligentpensions.com or call 0800 077 8807.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.