Pensions for children and grandchildren: the gift that keeps giving

It may not sound very festive, but pensions for children or grandchildren are some of the best Christmas gifts you can ever give them.

Not only can starting a pension for your offspring give them a great financial start in life, but also it is a tax-efficient way to pass on wealth.

With inheritance tax already hitting a growing number of families, this could be something your children and grandchildren will thank you for in future.

Let’s take a look at the benefits of pensions for children and how you can go about setting them up.

Why should I start a child’s pension?

One of the greatest weapons in any investor’s armoury is time. The effect of compound growth means that the more time money is invested – providing returns remain positive – the more it will grow.

Time to grow

Setting up a pension while your children are still young means that even small contributions have many decades to grow.

Think of a child’s pension as the acorn from which an oak tree can grow.

Security for decades

Putting money into a pension also means you won’t have to worry about your children frittering funds away before they’re mature enough to value financial security.

Under current legislation, your child or grandchild won’t get access to their pension fund until they’re at least 58.

Tax advantages of a child’s pension

There are several tax advantages to starting a pension for your child.

Firstly, like an adult pension, contributions to a child’s pension get a 20% boost from the Government in the form of tax relief, even though your child or grandchild is unlikely to be paying tax. This is something which Junior ISA accounts or cash savings accounts don’t give.

Secondly, making regular contributions to a child’s pension can count as a regular gift from income.

This means that the money may be free from inheritance tax (IHT) and it will also reduce the size of your estate for IHT calculations, while passing on wealth to your descendants.

Thirdly, any growth generated by the pension will not be liable for income tax or Capital Gains Tax.

When your child comes to draw down on the pension, current tax legislation means that 25% of the pension can be taken tax-free. The remaining 75% may attract income tax, under relevant regulations.

When can I start a pension for a child?

You can start a pension for a child from their birth.

Who can open a child pension

It is important to note that only a parent or legal guardian can set up a child pension.

However, once a child pension is set up, anyone can contribute, including grandparents, godparents, family members or friends.

The parent or legal guardian looks after the child pension until the child turns 18, at which point they are responsible for it.

As mentioned above, they will only be able to access the pension once they reach the age of 58, under current legislation. This age may rise in the future.

How much can I contribute to a child’s pension?

Under current legislation, a maximum of £2,880 can be paid into a child’s pension for the 2025/26 tax year. Adding to the 20% tax relief, this becomes £3,600 a year.

The power of compound growth

As an illustration of the power of compound growth, if you invested just £2,880 for one year for your child at the age of 8, by the time they were able to take the money out at the age of 58, the money would have grown to more than £26,500 (assuming an annual return of 4%).

Add in regular contributions and you can easily see how relatively small amounts of money can potentially grow into a sizeable pension pot. However, it is important to point out that this is dependent on investments producing a positive return.

When do I have to stop putting money into my child’s pension?

While your child will have control of their pension once they hit 18, you and others can still put money into that pension.

Again, making regular gifts from income into the pension can help reduce inheritance tax burdens while passing on wealth to your child.

How to choose the best pension for your child

There are a number of different pensions available to start up for your child and it can be daunting trying to work out which is best for them – and for you.

Why financial advice makes a difference

That’s one of the reasons why it is a very good idea to take expert financial advice before deciding on:

• whether you want to set up a pension for your child
• which pension to choose
• how much to invest
• how best to invest

An independent financial adviser will also help you to look at other aspects of your family finances, including ensuring that your own future is financially secure, as well as that of your child or grandchild.

Key takeaways – why a child’s pension is a gift for life

The idea of your child or grandchild one day having a pension may seem like decades away while they’re excitedly unwrapping their Christmas presents.

However, setting up a pension now could ensure not only they have a brighter future but their own children and grandchildren could do too.

Talk to us today to find out more about putting in place a true gift for life, not just for Christmas.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is also not a reliable indicator of future performance. Always seek professional advice before making financial decisions.