Pensions for children – what you need to know

22nd March 2024

At a glance

  • Starting a child’s pension is a tax-efficient way to save for their future and move money across generations.
  • 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.

Saving for retirement might not be something you think about starting while you’re still reading bedtime stories and going to soft play centres. But opening a pension for your children can set them – and their own future family – up for financial wellbeing.

Setting up a pension for a young child means even small contributions have more time to grow. 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. Financial advice can help you find the most tax-efficient way to help spread your wealth across generations of your family – and make sure that you’re not giving away more than you can afford.

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.

Like an adult pension, eligible contributions receive a 20% boost from the government – even though your child is not yet a taxpayer. 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 within the pension won’t be subject to Income Tax or Capital Gains Tax. A pension will of course be subject to Income Tax when it is 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 the normal minimum pension age, which is rising to age 57 in 2028, and is expected to rise again after that.

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

As a child will rarely have earnings, you can usually pay up to £2,880 into a child’s pension for the 2024/25 tax year. When you factor in 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?

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. Compounding is a key way to grow your wealth over time. 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.’

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, paying off a student loan or saving for a house deposit.

Pension saving helps reinforce smart money habits

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.

We believe money management is a life skill and everybody deserves to feel confident and in control of their own finances. Watching a small pension pot grow over time with regular contributions helps to reinforce good savings habits. And that’s one of the best investments you can make to set your child up for a financially secure future.

Helping a child save into a pension is a practical way to show them how compound interest works.

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 2024/25 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 you and your family

Taking financial advice will help you 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 all want to see our families face the future with confidence. Whatever route your children choose in life, money will play a big part in making it happen.

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 2023 accessed March 2024
2Money and Pensions Service, June 2023

SJP Approved 12/02/2024