Should You Start a Pension for Your Child or Grandchild?

Starting a pension as early as possible is something we are all aware is an astute plan if we are to enjoy a comfortable retirement. But just how early is ‘early’? Is setting up a pension for your child or grandchild a wise move?

Most people do not think about starting a pension until they are in full time employment. But there are in fact pensions that can be opened when a child is young. Parents and grandparents are increasingly turning to child pensions to help their younger family members later in life. Children are permitted to have a pension, and anyone can contribute to it.

What are the benefits of a pension for your child?

The appeal of setting up a pension for your child is that the money has many years to grow. Even a small amount of money paid into a pension fund on behalf of a child could be beneficial. By the time the child reaches their mid-50s and is allowed to access the money, in theory there should be quite a significant pot there to help them in later life.

If parents, or grandparents, have some spare funds to invest, then there are plenty of benefits of setting up a pension for a child whilst they are still young.

Currently, there is a limit of £2,880 that can be invested into a child pension fund in a single year. But this will benefit from a 20 per cent top up from the government, potentially meaning that the total amount could rise to £3,600 per year.

With funds building over a long period of time, there is more chance of investments rebounding from any economic challenges. In theory, the longer you pay into a pension, the greater the return on investment.

What’s more, when the child is older, they should not have to contribute as much from their own earnings in order to enjoy a comfortable retirement, than if they were starting their pension later in life.

Are there any disadvantages to setting up a pension for your child?

It is always important to weigh up the pros and cons of any financial decision, especially investment related ones.

If you are thinking about setting up a pension for your child or grandchild, the first thing to consider is whether you are in the position to do so. Taking independent financial advice is always wise, especially considering that any money contributed to a child’s pension may be liable to inheritance tax at a later date.

Another important consideration is that, although the ownership of the pension will pass to the grandchild on their 18th birthday, this does not mean that they will be able to access any of the money that has been paid into it. So for example, if money was required to get onto the property ladder, or fund higher education, it would not be possible to extract it from the pension post. Such events do of course come first, and may seem more like priorities than a distant retirement.

The current age at which savers are permitted to access their pension is 55 years, although this is set to increase to 57 in 2028, and may well rise further.

If this is a particular concern for a parent or grandparent, the alternative is to pay money into a children’s savings account, such as a junior ISA or a Premium Bond. Both will allow the child to access the money at any point once they become an adult.

How can I start a pension for my child?

Only a parent or legal guardian can set up a pension for a child. However, once it is in place, anyone can contribute towards it.

Many people opt for a junior self-invested personal pension (SIPP) when setting up a pension for a child. These usually offer a wide choice of funds and individual assets in which to invest.

For independent advice on setting up a pension for your child, talk to Partridge Muir & Warren

It is always a good idea to take independent financial advice when setting up a pension for your child. This way, you will be provided with options from the whole of the market, rather than from just a single pension provider. It may be that a certain type of pension product is more suitable than another, and without that full-market access, you may miss out on something that would have provided a better return.

At PMW, we have been providing specialist pension guidance to families for more than 50 years. We offer fully independent advice, and look forward to guiding you through the process of setting up a pension for your child or grandchild.

Please get in touch to talk to one of our helpful experts.