Should you contribute towards a pension for your grandchildren?

It is no secret that starting a pension as early as possible helps make it easier to save towards a financially comfortable retirement. While many people do not start a pension until they are in full time employment, there are, however, pensions that can be opened when a child is young and contributing to their grandchild’s pension can be a good way for grandparents to help their grandchildren later in life.

To help grandparents decide whether or not to contribute to their grandchild’s pension, we’ve looked at the benefits and disadvantages of starting a pension for grandchildren.

For grandparents with the spare funds to invest in a pension for their grandchildren, there are many benefits to setting up a pension when their grandchildren are young. Under the current children’s pension rules, the limit that can be contributed into a child’s pension each year is £2,880, but due to the Government tax relief at 20%, the total amount could rise to £3,600 per year.

Setting up a pension when the grandchild is young has the benefit of the investments building over a long period of time. This means that that the investment will have longer to rebound from any unforeseen economic crisis, such as a global pandemic, and should result in a larger return on the investment when the grandchild is ready to withdraw money from their pension pot.

As well as this, it means that when the grandchild is older, they will likely not have to contribute as much from their earnings to enjoy a comfortable retirement than if they were starting their pension later in life.

Those considering setting up a pension for their grandchildren should only proceed if they are financially able to do so and it might be worthwhile speaking to an independent financial adviser first.

Grandparents should also take into account that the money contributed to the pension may be liable to inheritance tax at a later date.

In addition to this, although ownership of the pension will pass to the grandchild on their 18th birthday, they will not be able to withdraw money from the pension until much later in their lives. The current age at which savers are able to access their pension is 55 but this is increasing to 57 in 2028 and could rise further. This means that they will be unable to use the money towards education fees or buying a home.

An alternative option for those concerned about this could be saving money into a children’s savings account, such as a Junior ISA or a Premium Bond, which will allow the grandchild to access the money when they become an adult.

Only a parent or legal guardian can set up a pension for their child, but once the pension is arranged, anyone can contribute.

When setting up a pension for a child, many opt for a junior SIPP (self-invested personal pension), which are usually offered by investment platforms and offer the choice of a wide range of funds and individual assets in which to invest.

For more information about setting up a pension for a grandchild and how to invest, read our guide on saving into a pension for grandchildren .