What is a children's pension and should your child have one?

What is a children's pension and should your child have one?

What is a child's pension, and what are the rules? Here's how to decide if a junior SIPP is a good idea for your child.


Set up a child's pension, and your kids will have a head start towards a stable retirement. Here are the pros and cons of children's pensions and the alternatives.


What is a child pension?


A child pension is a savings scheme set up on behalf of a child under 18 by a parent that anyone can pay into. It is a way to save for your child's retirement and has many features of adult pensions, including tax relief from the Government. Investment returns are also shielded from capital gains tax and income tax. However, they have a lower annual contribution limit, and your child won’t be able to access their nest egg until they retire in their sixties.


Why should you save for one?


The UK's average pension pot stands at just £42,651. This figure makes up just 18% of the recommended total of £237,000 for those retiring at age 67. The worrying finding revealed that a fifth of the nation has no pension provision. It's one of the many reasons why investing in a child pension is something to consider. Save the recommended annual amount from the age of 6 years, and your child could have £230,000+ (with 5% growth) alongside their workplace and state pension by the time they retire at 67.


What are the rules for children's pensions?


  • Annual contribution limit: You can pay a maximum of £2,880 a year into a child's pension, and with the current government pension tax relief of 20%, this sum would rise to £3,600.
  • Tax relief: Pension tax relief is an incentive for you to save into a pension. As an adult, when you contribute towards a pension pot, the government also pays 20% into your pension. The same happens for a child pension.
  • Eligibility: A child's pension must be set up by a parent (or legal guardian) for a child under 18. Relatives and grandparents cannot open one for a child.
  • Withdrawals: No one investing in the pension can withdraw the money invested. 
  • Contributions: Once a parent has opened a child pension, relatives and grandparents can pay into it, but only up to £2,880 per year.
  • Management: A parent or legal guardian manages a child pension account until a child is 18 years old.

Related: How to explain tax to kids


What do you need to consider before setting up your child's pension?


There are a variety of different child pensions. You can set up a ready-made personal or stakeholder pension with a chosen provider or choose from a broader range of investments. Make sure that you shop around and check the small print because extra charges can have a big impact on the size of your investment.


A Junior Self-Invested Personal Pension (SIPP) offers more choices than other child pensions. It gives you control over the investments until the child reaches 18 and can manage their account. This is a good option for those who are confident at investing. If you don’t want to choose the investments, a ready made pension is a better option as the portfolio is created by the pension provider.


If you are at all unsure speak to an independent financial adviser.


Related: How to teach your children about investing


When should you start paying into a pension for a child?


Most adults don’t  start paying into a pension until they are working but starting a child pension before this point gives your child’s investment more time to grow to a decent size by the time they retire. Which is why you can start saving into a pension for your child as soon as they are born or at any time before they are 18. 


What are the benefits of a children's pension?


  • Tax benefits. As with all pensions (adults and children), your contributions will grow free from Income and Capital Gains Tax.
  • Financial education. As your child gets older, talking to them about investments, savings, and pensions is fantastic for their financial education. Our recent economic research has shown kids who received financial education from an early age are £70,000 richer in retirement.
  • Compound interest. By saving early, you will benefit from compound interest. Compounding is when you earn interest (money) on the money you save and the interest you earn on that saving. For example, if you open a child pension when your child is born and pay £2,880 per year until your child is 18, you will have paid a total of £51,840. Even if you pay nothing else into this pension pot with a low pension growth rate of 5%, by the time your child is 65, the pension will be worth £500,000+.
  • It gives your child a headstart in saving. Giving your child a helping hand is one of the best benefits of starting a child's pension.


Related: What is saving and why is it important for kids?



What are the negatives of a children's pension?


  • Investment risk. As with all long-term investments, they can go up and down thanks to growth rates. Also, the rules surrounding pensions can and do change—for instance, the lifetime allowance and withdrawal age has changed in the last six years.
  • Risk of not being able to afford to make payments in the future. As with all investments, financial situations change, so what you can afford now may not be so affordable in the future. That said, any amount invested will still grow (see compound interest above).
  • Restricted access. Your child may need to access money in the future, but this money is locked-in until retirement.
  • You never know what the future holds. A child pension sets a child up for retirement but won't help before this point.


What happens to your child's pension when they turn 18?


When your child turns 18, they will gain control of the pension account and it will become an adult pension. However, they will not be able to withdraw any of the money. Under current rules, the money in a pension can only be accessed from age 55 (57 from 2028). 


At this age, up to 25% of the total value of the pension can be withdrawn tax-free (anything else has a tax liability on it). This age is likely to change over your child's lifetime.


Related: Why your child should have a savings account


What are the alternatives to a child's pension?


If you decide that a pension is not the best route for you and your family, there are other options to save for your child’s future, including:


  • General savings account
  • Premium Bonds
  • Children’s savings account
  • Junior cash ISA
  • Junior stocks and shares ISA


An excellent alternative to a child pension is a Junior ISA. This is a long-term tax-efficient way to invest money for your child. You can apply via the GoHenry app and start your investment with as little as £1. You can deposit up to £9,000 this tax year (2021-2022) without paying any tax on the interest or returns on your investment. All the money is locked away until your child reaches 18.


Another option is to maximise your own pension contributions as you can then pass your retirement savings onto your children tax free as part of your estate if  you pass away before the age of 75. After this age inheritance tax will apply to estates over £325,000.



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Written by Anita Naik Published Dec 2, 2022 ● 3 min. read