Giving your child a financial head start: why a pension could be worth considering

When it comes to investing in your child’s future, retirement planning probably isn’t high on the list of things that would cross your mind.

But, starting a pension for your child while they’re young could give them something incredibly valuable: time.

Even relatively small contributions at an early age have decades in which they could potentially grow, giving them financial security in the future, while also coming with tax advantages that you wouldn’t find in more traditional routes, like a children’s savings account.

At a glance

• A child’s pension can be a tax-efficient way to save for their long-term future, while potentially forming part of your Inheritance Tax planning.
• A parent or legal guardian must open the pension, but once it is set up, anyone can contribute.
• Starting early gives contributions a long time to benefit from the potential effects of compound growth.
• A pension is designed for the long term, so the money generally cannot be accessed until the child reaches the relevant minimum pension age.
  
  

Why start a pension while your child is young?

There are plenty of ways to save for a child, but a pension is another option that is easily (and understandably) overlooked.

The reason is potentially rather obvious: pensions feel like something for much later in life. And that’s precisely what can make starting one early so powerful.

While putting money into a pension for a child still at primary school might feel counterproductive, the long-term nature of the investment means that even modest contributions could have the opportunity to grow significantly.

Contributions to a child’s pension also benefit from tax relief at the basic rate (20%), even if the child has little or no taxable income themselves. This is something you wouldn't get by simply putting the same money into a standard savings account.

A pension, therefore, can be form a useful part of a wider plan for passing wealth to the next generation.

Why starting early matters

Time is one of the biggest advantages a child has when it comes to investing, and that's because of compound growth.

Put simply, when your investments generate a return, that return can remain invested and potentially generate further returns of its own. Over a long enough period, this can make a surprisingly large difference.

In other words, you don't necessarily need to start with a large amount of money - a small contribution made consistently from a child's early years could have many decades to potentially grow.

And, because the investment horizon is so long, you may also be able to consider a different level of investment risk than you would for money you’d otherwise need in the near future.

For example, younger investors may have more capacity to invest in higher risk equity-based funds that tend to get more in returns, although the appropriate level of risk will always depend on the individual circumstances and objectives involved.

Of course, investments can fall as well as rise, and there is no guarantee that your child will get back what was originally invested.

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

For a child without relevant UK earnings, there are limits on the amount that can receive tax relief.

For the 2025/26 tax year, you could contribute up to £2,880 into a child’s pension. With basic-rate tax relief of 20% added, that becomes £3,600 invested into the pension.

You don't necessarily have to contribute the maximum, though. A regular monthly contribution can be just as valuable as a larger one-off payment, particularly when you consider how long the money could remain invested.

Tax allowances and legislation can change, so it's important to check the rules that apply at the time you make your contribution.

When can a child start investing in their pension?

Fortunately, there is no minimum age for opening a pension for a child. While a parent or legal guardian will need to set it up, once the pension is in place, contributions can come from almost anyone, be that Grandparents, godparents, other relatives or family friends.

The parent or guardian manages the pension until the child reaches 18, at which point the responsibility passes to them. Once the child takes control of their pension, they will have to wait until they reach the minimum pension age before they can access their pension. This currently stands 55 and is due to rise to 57 from 2028, with an expectation of further rises to follow.

In the meantime, any investment growth within the pension is generally free from UK Income Tax and Capital Gains Tax. When your child eventually comes to draw down on it, they can take 25% tax-free and the rest will be subject to income tax at their marginal rate according to regulations at the time of writing.

What happens when they turn 18?

While the inclination might be to stop contributing when the child takes ownership of their pension, this doesn’t have to be the case. In fact, continuing to contribute could give them another valuable head start.

Retirement planning isn't always going to be at the top of an 18 or 21-year-old's list of priorities. They may be starting their career, about to take on (or star to pay off) a student loan, saving for a house or simply enjoying their newfound independence.

They may neither have the money nor the desire to continue to invest in the pension you set up for them, so continuing to contribute to it on their behalf means you can keep investing in their future while they concentrate on the financial priorities that matter to them in the here and now.

It can also act as a useful way of introducing them to the idea of saving and investing for by directly getting them engaged in their own financial future and improving their financial literacy.

Could a child’s pension help with Inheritance Tax?

For parents and grandparents thinking about passing wealth to their children or grandchildren, gifting money into a pension can also form part of a wider Inheritance Tax planning strategy.

For example, pension contributions may fall within your available annual gifting allowance of £3000, which is classified as the amount you can give away annually without it being added to the value of your estate.

If you also happen to be in a position where you can make regular gifts from surplus income without affecting your own standard of living, those gifts may also be exempt from Inheritance Tax.

The rules around gifting and Inheritance Tax can be complicated however, and whether a particular contribution qualifies will depend on your circumstances, which is why this is one area where we strongly advise speaking to a qualified financial adviser before making substantial gifts, especially as the levels and bases of taxation, and any reliefs from taxation, can change at any time.

Investing in their future shouldn't mean neglecting yours

It's natural to want to give your children the best possible start in life, but there is a balance to be struck between helping them financially and making sure you're financially secure yourself.

Before putting money away for your children, it's worth making sure you have an appropriate emergency fund, adequate protection and sufficient provision for your own retirement.

After all, there is little benefit in building a substantial nest egg for your children if doing so leaves you financially vulnerable later in life.

The right approach will be different for every family. A financial adviser can help you look at the bigger picture, including how much you can comfortably afford to give, which savings or investment vehicles are most appropriate, and whether your plans could form part of your wider estate and Inheritance Tax planning.

Thinking about your child's financial future?

No matter what route you take, the earlier you start planning on how to pass on wealth to your children, the more options you may have.

If you'd like to discuss how you could invest for your children's future while also protecting your own financial position, get in touch with our team for a no obligation consultation to see how we can best help you and those closest to you secure their financial future.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.