With the cost of children’s birthday presents and parties often totalling hundreds of pounds – could there be a better way to provide for your child or grandchild?

Investing in setting up a pension for your child can provide numerous long-term benefits and go some way to helping them secure a financially stable future. Setting up a pension for your child can also help teach them about the importance of saving and investing for the future.

Who can set up a child’s pension?

Setting up a pension for a child can be done by a parent or legal guardian; this can be done as soon as the child is born.

Who can contribute?

If you’re a grandparent keen to help out, the good news is that anyone can contribute into the pension, as well as godparents, relatives or friends. As a parent, you manage the pension saving plan until the child turns 18.

What happens when they turn 18?

Whilst they gain control at 18, they won’t be able to access the money until they reach the normal minimum pension age.

How much can you contribute?

Under current rules, after setting up a pension for a child you can pay up to £2,880 into a children’s pension each year. This will then receive basic rate tax relief, so the government will boost this to £3,600. The majority of people setting up a pension for their child won’t pay this much into it, instead, they may choose to make smaller contributions, which will still build up over time and benefit from tax relief.

Why set up a child pension?

It may seem odd thinking about setting up a pension for your child when they are so young, but not only will it help your child later on in life when they think about retirement, but also help with the amount they might contribute into their pension during their lifetime, potentially freeing up more money to fund other life events.

What about a Junior ISA (JISA)?

Another worthwhile tax-efficient children’s saving option is a JISA. One key difference between setting up a children’s pension and a JISA is that with the latter, your child can access the money when they turn 18. With any pension, the money can only be used to save for retirement.

The early bird

Setting up a pension plan for your child can provide them with the financial security they need to achieve their goals in the future. By setting up a pension early, they can benefit from compound interest and reinvested dividends, tax benefits, and the potential to grow their savings over time.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future.

It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within the blog is for information purposes only and does not constitute financial advice.

The purpose of the blog is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.