Who wants to make their baby a millionaire?

Most parents hope to give their children a solid financial foundation for the future, and there are many ways to do so. The best approach depends on how much access you want your child to have to the money, and the level of risk you are comfortable with.

With changes to Inheritance Tax (IHT) on pensions due in April 2027, grandparents may wish to consider gifting to their loved ones now to help reduce future tax liabilities.

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Starting early can make a remarkable difference to a child’s long-term finances. For instance:

£9,000 per year saved into a Junior ISA (JISA) could be worth £266,000 at age 18 – or £1.8 million if left untouched until age 57.

In addition, regular pension payments of £2,880 a year from birth until age 18 could grow into a pension pot of more than £737,000 at age 57, from a total contribution of £51,000. 

Junior ISA

If parents or grandparents were to save £9,000 a year into a Junior ISA (JISA) for an eligible child, assuming growth of 5% per annum, by age 18 that child could have a tax-free lump sum of nearly £266,000 (please see Table 1 below).

If they then transferred their JISA funds into an adult ISA at 18 and left it until retirement, it could grow to almost £1.8 million by age 57 (please see Table 1 below).

All this comes from an initial investment of £162,000 over 18 years, showing the power of compounding. 

Don’t forget about pensions 

For those concerned that a child might spend their savings too soon, contributing to a pension can be a good alternative. The funds cannot be accessed until age 57 (assuming no change to current legislation).

Even if the child has no income, pension contributions still qualify for basic rate tax relief on total contributions of up to £3,600 per year.

This can be an achievable option for many families. A maximum gross contribution of £3,600 each year until age 18 costs £2,880 net annually (£51,840 over 18 years), with the government adding £720 in tax relief each year (£12,960 in total).

Assuming 5% growth until age 57, and even with no further contributions after 18, the pension could still reach £737,000 (please see Table 1 below).

That comes from just £51,840 in net contributions.

When the child begins making their own pension payments, assuming they contribute 5% of a £30,000 salary from age 30, with matching employer contributions, that could add another £168,450 over 27 years (please see Table 1 below).

The total pension at age 57 could then exceed £905,000. Combined with the JISA/ISA investment, that amounts to around £2.69 million.

Even allowing for inflation reducing returns by 2% a year, this would still equate to more than £1 million in today’s money at age 57.

Table of Calculations 1, assuming 5% growth - not inflation adjusted

Contributions	Money out - after 18 years	Money out - age 57
Junior ISA/ ISA
Parent	Money in for 18 years £162,000
Total return from JISA	£265,851 (at age 18)	£1,782,465
Pension
Parent	£51,840
Government	£12,960
Total from stakeholder		£737,123
Child/ employer contribution to pension (from age 30 to age 57 assuming level income of £30,000	£125pm gross (£100 child plus  £25 tax relief) = £32,400 + £ 8,100 tax relief = £40,500 total	£84,225
Employer contribution	£125 pm gross = £40,500 total	£84,225
Total from additional pension		£168,450
Overall total from pensions		£905,573

Total at age 57: ISA (£1,782,465) + Pensions (£905,573) = £2,688,038

While these sums appear substantial, inflation will inevitably reduce purchasing power over time. Even assuming a 3% growth rate (allowing for 2% inflation), your child could still receive a significant sum at age 57.

In our example, the future value of £2,688,038 after 57 years would be worth the equivalent of £1,097,888 today, if inflation reduces real value by 2% each year (assuming a growth rate of 5%).

Table of Calculations 2, assuming 3% growth (so allowing for 2% inflation)

Contributions	Money out - after 18 years	Money out - age 57
Junior ISA/ ISA
Parent	Money in for 18 years £162,000
Total return from JISA	£217,052 (at age 18)	£687,409
Pension
Parent	£51,840
Government	£12,960
Total from stakeholder pension		£286,365
Child/ employer contribution to pension   (from age 30 to age 57 assuming level income of £30,000	£125 pm gross (£100 child plus £25 tax relief)=  £32,400+8,100 tax relief = £40,500 total	£62,057
Employer contribution	£125 pm gross = £40,500 total	£62,057
Total from additional pension		£124,114
Overall total from pensions		£410,479

Total at age 57: ISA (£687,409) + Pensions (£410,479) = £1,097,888

How the upcoming changes to inherited pensions could encourage earlier gifting

With the announcement of new rules on inherited pensions, many people who had planned to leave their pension pots to children or grandchildren free of IHT are reconsidering their options. The changes take effect from April 2027, but families are already exploring alternatives.

One approach is to start gifting sooner. For example, a grandparent could draw from their pension and pay directly into a grandchild’s stakeholder pension. This reduces the size of their own pension – and therefore the value of their estate potentially subject to IHT if the pension were not passed to a spouse.

If these contributions are made from regular surplus income, they may qualify as an “exempt transfer from normal expenditure out of income” under current IHT rules. This means the gifts are immediately outside the estate, without the need to survive seven years as required for larger lump-sum gifts.

There is, however, a balance to consider. The grandparent may pay income tax on the pension withdrawal, potentially at 40% or 45% depending on their marginal rate. But the grandchild receives 20% tax relief on the pension contribution, which helps to offset that cost, whether they are a minor with no earnings or an adult with taxable income.

From an intergenerational planning point of view, this can be a highly efficient way to pass wealth down the family while reducing future IHT exposure. The funds are outside the estate (either immediately if classed as an “exempt transfer from normal expenditure out of income” or after seven years if a potentially exempt transfer) and continue to grow tax efficiently in the grandchild’s pension.

Furthermore, if the contribution is made directly into the pension of an adult child who is a higher or additional rate taxpayer, the child can also claim higher or additional rate tax relief on those contributions.

Can I afford to give money away now?

It is natural to worry about whether you can afford to start gifting sooner rather than later – and this is an important question.

This is where sound financial advice makes all the difference. Cashflow planning allows you to map out your future goals for yourself and your family, helping you visualise what is realistic and achievable. It creates a personalised plan with scenarios to support sensible decision-making – like a financial crystal ball. 

Final Comments

There are many ways to support your children financially throughout their lives, but saving for their retirement removes a significant burden. It might seem unusual to think about retirement savings when your child is still a baby, but investing early and allowing time for growth in equity markets can make an enormous difference to their financial security later on.

The financial pressures facing younger generations – from high education costs to expensive housing – often make it difficult to save for retirement early in life.

In time, they are likely to make their own and their employer’s contributions, which could help them retire earlier and enjoy more time with family and friends. It’s a wonderful gift to give a child. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.

Investment returns are not guaranteed, and you may get back less than you originally invested.