Why opening a pension for a child before they start school can unlock powerful growth

It really is never too soon to start investing through a pension. You may not be thinking about the retirement lifestyle that your children or grandchildren will enjoy quite yet, but opening a pension before they even start school can be worthwhile.

If you’re looking for a way to help secure a child’s financial future, a pension can ensure their later life is far more comfortable and provide them with a valuable foundation for later life.

Here are three reasons why investing through a pension on behalf of a child can lead to powerful growth:

1. Tax relief will provide an instant boost

Pensions opened on behalf of a child work in the same way as those for an adult. That means contributions will benefit from tax relief, which provides an instant boost to the money you’re setting aside.

Pension holders that don’t earn an income, including children, can add up to £2,880 a year to a pension. With tax relief, this brings the annual sum up to £3,600. By making the maximum contribution from birth until they’re 18, they’d receive almost £13,000 through tax relief alone.

2. Compound growth is powerful over the long term

When opening a pension for a child, the money is invested for decades. This provides plenty of time to benefit from compound growth. This is where an asset’s earnings are reinvested to generate additional earnings over time. The compounding effect means returns grow exponentially.

To put this into perspective, Morningstar calculates that if you make a one-off contribution of £2,880 (£3,600 with tax relief) when a child is born the pension would be worth £90,000 after 66 years, assuming an average growth of 5% a year.

If you contributed the annual maximum amount for the first 18 years of a child’s life, the value would be more than £1.1 million by the time they reached 66. The power of compound growth means they could still have a comfortable retirement even if they didn’t make contributions during their working life.

3. It provides a foundation for your child or grandchild to build on

Instilling good money habits in children can set them on the path to a financially secure future. By contributing to a pension throughout their childhood, you can help get them into the habit of saving for the long term early. It also means they won’t be starting from scratch when they enter the workforce, which can motivate them to keep adding to a pension.

It’s not just financial benefits offered by a child’s pension

Saving enough to retire on is a huge undertaking and can seem like a daunting challenge. That’s why starting a pension for your child or grandchild can improve their wellbeing and outlook.

More than half (58%) of non-retired people aged between 45 and 60 worry they won’t have enough money to provide an adequate standard of living in retirement, according to an Aviva survey. Even younger generations, who still have several decades to save, have concerns. Two-thirds (66%) of workers aged between 35 and 44 have concerns about retirement finances. Paying into a pension fund early could help alleviate some of these worries.

Having a pension foundation could also mean children or grandchildren have more flexibility later in life. The State Pension Age is rising and will reach 67 by 2028. By the time the children of today reach State Pension Age, it’s likely they’ll be in their 70s. Having a personal pension to fall back on means they may be able to give up work earlier if they want to.

3 questions to ask before setting up a child’s pension

Before you open a pension for your child or grandchild, you should consider the alternatives. A pension isn’t the right option for every family. These three questions can help you understand if a child’s pension is something you should research further:

1. Do you have an emergency fund? Remember you cannot access funds you place into a pension until the pension holder reaches the minimum pension age, currently 55 (rising to 57 in 2028). Before investing additional funds into a pension, including on behalf of your child or grandchild, you should ensure you’re in a financially stable position.
2. Have you made use of a Junior ISA (JISA) or saving products for children? There are other saving and investing products aimed at children which can provide more flexibility. Some, for example, will allow you to make withdrawals at any time, which can be useful. Others will become available when the child is 18 and could pay for other milestones, like further education, driving lessons or buying a home. A JISA is a tax-efficient option for investing and saving a nest egg for when your child reaches adulthood.
3. Are you prepared for the money to be inaccessible until your child reaches retirement age? Keep in mind that any money contributed to a pension will be locked away. You should think carefully about this and ensure it aligns with your priorities and circumstances.

Please contact us if you’re thinking about opening a pension on behalf of your child or grandchild. It can be a useful tool and we’re here to help you see how it fits into your financial plan, as well as offering advice on products, contributions and more.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.