Pensions for children – what you need to know

17th November 2023

Setting up a pension as early as possible means even small contributions have more time to grow, putting your child on the path to future financial wellbeing.

At a glance

  • Starting a child’s pension is a tax-efficient way to save for their future and set them up for future financial wellbeing.
  • Only a parent or guardian can set up a pension for a child, but then anyone can contribute.
  • By starting early, even small contributions to a child’s pension have time to grow, with the power of compounding at play.

Saving for retirement might not be something you think about starting in childhood, but creating a pension for your children can set them – and their own future family – up for financial wellbeing.

Pensions are a tax-efficient way to save, and setting up a pension as early as possible means even small contributions have more time to grow. Even if you’re gone, your money will still be working hard for your family, well into their own retirement. And given that we’re all living longer – one in five girls and one in seven boys born in 2020 are expected to live to 1001 – planning now for your family’s future can have a real positive impact. "People are thinking ‘how can I make the most of my money for me and my family?’ says Tony Clark, SJP’s Senior Proposition Manager: ‘how can I get the most value out of it? Financial advice is there to help you find the most tax-efficient way, and making sure that you’re not damaging your own financial capability. while you’re helping out your family.”

When can you start a pension for a child?

A child can have a pension from birth – there’s no minimum age. Only a parent or guardian can set up a pension for a child, but once it’s up and running, anyone can contribute – parents, grandparents, godparents, friends or other family members. Whether you’re a member of the family or a friend, any contribution you make to the pension counts as a gift. That means it may be tax-exempt under your annual gifting allowances. Check with your financial adviser to make sure. 

Like an adult pension, eligible contributions receive a 20% boost from the government – even if your child is not yet a taxpayer. And if the time comes and your child becomes a higher or additional-rate taxpayer, they can claim further relief on future contributions via self-assessment. This tax relief from the government is something you won’t get from an ISA, another tax-efficient saving tool.

In addition, any growth generated by the pension won’t be subject to Income Tax or Capital Gains Tax, until it’s accessed in future years. 

If you’re the child’s parent or guardian, you’ll look after their pension until they turn 18. At that point, control passes to them. But they won’t be able to access their pension until they reach age 55, which is rising to age 57 in 2028.

How much can you pay into a child’s pension?

One key difference between an adult’s pension and a child’s pension is the amount you can contribute each year.

You can pay up to £2,880 into a child’s pension for the 2023/24 tax year. When you take into account the 20% in tax relief from the government, this adds up to £3,600.

Saving into a child’s pension is a rewarding way to spread your wealth among your children and grandchildren. And it’s a gift that keeps on giving, since it helps mitigate an Inheritance Tax (IHT) liability by reducing the size of your estate. Payments may be covered by the annual £3,000 tax-free gifting allowance, or the exemption for regular payments if made out of surplus income.

How does compounding work?

While the annual contribution limit for children is much lower than that for adults, the magic of compounding means even small contributions can add up over the long term. “Starting early, and saving regularly can have an extraordinary impact,” says Tony, “It’s all about compound interest – it is the key to growing wealth. Albert Einstein called compound interest the eighth wonder of the world and famously said: ‘Those who understand it, earn it, those who don’t, pay it.’

“The secret is to start saving into a pension as early as possible, even with relatively small amounts, to take advantage of it.”

Essentially, compounding is growth on top of growth. When the money generated by your investments is reinvested, it has the potential to generate its own growth. So the longer money is invested, the greater the benefit will be from the compound effect of those reinvested returns. It’s like interest on the interest.

In addition, as children have time on their side, you may feel comfortable with more risk with their pension investments, than you do with your own. It's not unusual for younger investors to be fully invested into equity funds, for example.

How will your child benefit from a pension?

Pension contributions aren’t often top of a twenty-something’s priorities, understandably. But saving into a pension for your children can ease the pressures they face as they enter adulthood. Your contributions will mean they can focus on building their career, or starting a family and buying their first home. And you’ll be building their own financial capability too, by helping them to see how tax relief works, and the value of regular saving.

"Good money management is a life skill,’ says Tony. “Educating the next generation in financial literacy is not a nice-to-have – it's the best investment you can make to secure their financial future".

Children learn their money saving habits very early in life, yet young children rarely receive lessons on budgeting and money management. In May 2023, the MaPS reported that less than half the UK’s children had been taught basic money skills, either at home or at school2.

Helping a child fund their own pension could be one way to help them understand concepts such as compound interest.

How else can I invest in my family’s future? Starting and contributing to a child’s pension isn’t the only way to save for their future. A Junior ISA (JISA) is another popular choice.

A JISA must be opened by a parent or legal guardian, but after that, anyone can contribute. As with other ISAs, any returns won’t be subject to Income Tax or Capital Gains Tax. This is a win for you, as well as for them. By gifting money to your children, you’re removing money from your own estate, which could help reduce any IHT when you die. 

As of the 2023/24 tax year, you can contribute £9,000 per child into a JISA each year. Your JISA can be either stocks and shares, cash or a mix of both. Keep in mind that the tax advantage that comes with all ISAs is one that you have to ‘use or lose’ – you can’t roll it over into another year.

Improving the financial future of your family

We all want to see our families achieve their potential and face their future with confidence. “Money is the great enabler,” says Tony. “Whatever route you choose in life, or dreams you have, money will be part of making it happen. Financial planning between generations, with child pensions or JISAs, keeps money flowing through families, going where it’s needed most, in the most tax-efficient way.”

Taking financial advice will help you put a plan in place – so you can find the right balance between paying for your children’s needs now, saving for their future, and making sure your future is well provided for too.

It’s important to check to make sure you’re in a good financial position yourself, so you don’t give away more than you can afford. Before setting up a pension for your child, you should have a savings safety net and protection, and be certain that you’re saving enough for your own retirement.

We are experts in advising families. To talk about the best ways to invest for your children’s future, get in touch.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.


1Past and Projected Period and Cohort Life Tables: 2020-based, UK, 1981 to 2070, Office For National Statistics, January 2022
2Money and Pensions Service, June 2023

Pensions for children – what you need to know
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