How to start a pension for your child or grandchild

If you want to give your child or grandchild a great start in life, you might be considering starting a children’s pension for them, which will grow over the years into a tidy little nest egg for them to reap the benefit from. But what is a child pension?

In our simple guide, we’ll take a look at what a child pension is, how they work, the benefits to setting one up, and more. 

What is a children’s pension?

Before we get into how to start a pension for your children, let’s start with a fundamental question: what is a child pension? A pension for children might sound odd at first, when there are all sorts of life events still to come – be it going to university or buying their first home – but it can not only help your child later on in life when they do start to think about retirement, but also help with the amount they might need to contribute into their pension over their lifetime. Leaving them more available money to fund other life events along the way.

A better-known tax efficient children’s saving vehicle is a Junior ISA, the main difference between children’s pensions and junior ISAs is that with the latter, your child can access the money when they’re 18 and do whatever they like with it. With a child pension, the money can only be used to save for retirement, so while it can’t be used to help them out financially in the meantime, starting a child pension fund could provide them with additional financial security not only in retirement but in their ‘saving for retirement’ years as well. 

How do pensions for children work?

Setting up a pension for children isn’t as complicated as you might think. You can do it directly with a range of pension providers, so it’s worth shopping around before settling on a provider. They tend to work in much the same way as adult pension plans – the main difference is that they’re set up by a parent or legal guardian on the child’s behalf and controlled by them until they’re 18. Whilst they must be set up by a parent or legal guardian, anyone can contribute, from parents themselves to grandparents, godparents, or relatives.

For more confident investors, a self-invested personal pension (SIPP) may be considered, as these generally offer a wider range of investments and greater control over retirement planning. Alternatively, pensions can be set up via a personal pension or a stakeholder pension which allow you to invest in either readymade portfolios or a choice of funds.

There are a few things to think about before setting up a child pension fund. Before you do so, it’s important to make sure that you have a sufficient safety net of emergency savings and financial protection to protect yourself and your loved ones. Plus, you should ensure that you’re also saving enough towards your own retirement.

Of course, pension rules, regulation and legislation are subject to change and will likely do so before your child comes to retire, so how and when the pension funds can be used by your kids will be determined by the rules at that time.

Are there limits on children’s pensions?

Under current rules you can pay up to £2,880 into a children’s pension each year, this will then receive basic rate tax relief  which means that the Government will boost this to £3,600. 

The majority of people setting up a children’s pension won’t pay this much in. Instead, many providers will allow you to put as little as just £25 a month in. Contributions can also be flexible, giving you the opportunity to stop and resume payments if required, while also allowing you to put in lump sums.

When can a child withdraw the money from a child’s pension?

When you set up a children’s pension for your child, you manage and control the pension. Then, when your child turns 18, control is passed to them.

However, whilst they gain control at 18, they won’t be able to access the money until they reach the normal minimum pension age. At present, the normal minimum pension age is 55, but it’s set to rise to 57 in 2028. 

Accessing the money before they reach this age would be deemed an unauthorised payment and could be subject to a tax charge of up to 55%.

What are the benefits of setting up a pension for your child?

As you might expect, most people won’t start thinking about saving for retirement until they enter the workforce, but the earlier you start the better. It’s never too soon to think ahead, and by setting up a pension for your child, you give the pot of money the opportunity to grow over a longer time period – even if you only save small amounts.

Tax reliefs are used by the Government to encourage people to save for their retirement, and children’s pensions also benefit from these tax reliefs – in effect the Government will top up the contributions made. Contributions are boosted by basic rate tax relief, funds within a pension wrapper grow in a tax-free environment and once your child reaches retirement, 25% of this pot will be available to withdraw tax free (under current rules).

Another key benefit of saving into a children’s pension is investment growth , as you’ll see the money invested grow as you receive returns from funds, bonds and shares.

Then, there’s the compounding effect, as your child can expect to get growth on growth over the years. Should the value of the original investment go up, your returns in the next year will be based on the increased amount, and so on.

If you were to invest £300 per month (including tax relief) from birth, to meet the maximum tax-free allowance of £3,600 yearly, £64,800 will have been invested over the course of 18 years. With an average investment return and investment-management charge of 4.5% each year and 0.75% each year respectively, the fund will stand at £91,800 at age 18.

If this money was then held in the pot for another 42 years, taking the child up to the age of 60, with the same investment return and charges it could be worth around £450,000. An excellent start to your child’s retirement planning. 

A pension for children can also provide educational value, encouraging your child to become more involved with their finances at a young age, and introducing them to basic saving and investment concepts that should stand them in good stead into adulthood.

How we can help

Setting up a child pension is something that a lot of people might consider, but is it right for your family? Well, that will depend on your financial situation, but it’s something that can really help your child when they’re older.

Here at The Private Office, we like to work with families across all generations, and so can offer advice on whether setting up a children’s pension is right for your family. You can get in touch online to speak one of our experts and for those with £100,000 or more in pensions, savings and investments we are also offering a free review worth £500. Contact us here.

Arrange a free consultation

Please note: A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.