Early start pension advantage: saving £300 a month towards child’s retirement may leave them £289,000 better off

 Early start pension advantage: saving £300 a month towards child’s retirement may leave them £289,000 better off

• Investing £3,600 a year into a foundation pension for a child from birth to 18 could leave them with £289,000, assuming a retirement age of 65
• Starting at age 10, the same monthly sums may build a nest egg of £112,000

Family and friends who put away £300 a month into a pension pot from the day a child is born up until their 18th birthday may be able to pass on a pot of close to £300,000 by the time, they reach 65, according to new analysis by St. James’s Place (SJP).

Contributing to a pension for a child, often referred to as a foundation pension, will give them the benefits of compounding and tax relief to build a pension pot. While only parents or legal guardians can open a pension for their child, contributions can be made by anyone, including relatives, godparents or family friends. Alternatively, making a single one-off investment of £3,600 gross in one tax year - which is currently the maximum permitted to be invested annually on behalf of those with no income - could result in a pension pot of £19,700 by retirement age of 65.

However, by investing £3,600 gross every tax year up to the age of 18, which includes tax relief at the basic rate, without any further contributions the child could receive a pot of £289,000 by the time they reach retirement age. Even though most children will not have any income, they are still entitled to tax relief on contributions paid by them, or on their behalf in the same way as anyone else. This means the maximum contribution is £3,600 gross, which includes 20% tax relief. Therefore, the actual contributions paid is £2,880 with the scheme reclaiming the difference from HMRC.

Children’s pensions pots optimal way to pass on money tax-efficiently

SJP’s analysis shows that contributions made by parents, grandparents, godparents, aunts, uncles, and family friends towards a child’s pension will give them a significant financial boost, benefiting from years of compounding, while also minimising family members’ potential inheritance tax charges.  A net contribution of up to £2,880 would fall within the annual inheritance tax gift allowance (£3,000 a year). Additionally, the contribution can be regarded as normal expenditure from income and therefore won’t be subject to inheritance tax on death if documented correctly.  It could also be a potentially exempt transfer (PET), which means it would likely be free from Inheritance tax seven years after the gift has been made.

Based on specific assumptions1, the calculations indicate the following:

Claire Trott, Divisional Director for retirement and holistic planning at St. James’s Place, comments: “Our analysis shows that transferring wealth to your children from early on can reap great rewards later in life. By investing when they are still young, children’s pension pots are growing for many more years compared to the majority of people who only begin saving for retirement when they begin working, typically in their twenties, or even when they’re much older. As such, they’re likely to grow a considerably larger sum by retirement age.

“With life expectancy growing, and individuals having increasingly more responsibility for their retirement funding, putting money away for your child’s retirement when they’re born could turn out to be a priceless gift. In fact, our research found that one in ten over 55s who are planning to pass on their wealth intend to do so in the form of a pension2. So, it’s worth setting aside any additional money you have, towards their retirement. Work bonuses can be a good way to save a lump sum every year, but alternatively, spreading investments regularly across the year is also a wise move. Not only may this generate higher returns over a longer period of time thanks to pound cost averaging but, by drip feeding money regularly, it also removes some risk if markets fall in value in the short term.”

Notes to Editors

Calculations assume:

• The annual assumed growth in the investment before charges is 4.61% each year
• Investment charges of 1.96% each year
• Please note that these benefits are not guaranteed. Benefits depend on how the investment grows and its tax treatment.
• Annual contributions are paid on the member’s birthday and on each anniversary.
• No early withdrawal charges apply
• Investments are subject to inflationary pressures 

These figures are illustrative and are not guaranteed. Actual investment returns may be lower than those illustrated. 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.

Research conducted for St. James's Place by Opinium, between 13th and 26th January 2023, among a nationally representative survey of 1,000 UK adults aged 55-85 with £50,000 or more in investable assets.

Notes to Editors

This information is for the sole use of journalists and media professionals, and has not been approved by St. James’s Place Financial Promotions. Any calculations shown are for illustration purposes only and are not guaranteed. Actual investment returns may be lower than those illustrated.