Can I save into a pension for my grandchild?

Many grandparents want to help their grandchildren financially, and the best option will likely depend on your preferences and overriding goals. You may want to put money into a Junior ISA, for example, or perhaps Premium Bonds, but if you’re thinking for the future, giving them a head start by saving into a pension could be ideal. It’s certainly a long-term option, but that’s the beauty of it – the money held in a child’s pension has got decades in which to benefit from investment growth, which could leave them with a sizeable nest egg by the time they come to retire.

Children’s pensions work in much the same way as versions for adults, albeit with a few differences, namely in terms of the amount you’re able to contribute. The limit currently stands at £2,880 a year, though thanks to Government tax relief at 20%, the actual amount that could build up each year is £3,600. Once the child turns 18, ownership of the pension will pass to them, but they won’t be able to access the money held in it until they’re 57 (based on the current timeline).

It’s only parents or legal guardians who will be able to set up a pension for a child, but once arranged, anyone is allowed to contribute. A junior SIPP (self-invested personal pension) will usually be the preferred choice, which will offer a wide range of funds as well as individual assets to invest in. 

They’re usually offered by fund supermarkets or investment platforms – such as this one from interactive investor – and can offer a huge amount of flexibility, but it’s important for anyone setting up a pension for a child to be aware of the various charges that may be applicable to ensure they don’t eat into the capital.

It’s normally possible to pay any money directly into the pension fund itself, such as via cheque or transfer. However, make sure to be mindful of contribution limits, particularly if other family members are paying in as well.

It’s also important to consider your personal finances when it comes to this form of pension saving, the main issue being ensuring you’re not so generous that it impacts on your own quality of life. This is why proper financial planning is essential, ideally utilising the expertise of an independent financial adviser, to ensure you’re making the right decisions for you as well as your grandchildren.

One of the key benefits of saving into a pension for a grandchild is the long-term nature of the financial gift. Thanks to investment growth there’s a very real possibility that the child will have a substantial sum by the time they turn 18, which could be even larger when they retire, and there won’t be the temptation to spend that money earlier on.

It’s still important to bear in mind gifting rules – money deposited into a grandchild’s pension could potentially become liable for inheritance tax at a later date – but given the rising need for everyone to have a decent pension, and the worrying pension gap that currently exists, giving your grandchild long-term financial security could be one of the best gifts you give them.