Are you ever too young to have a pension?

If you’re looking for a way to help your children or grandchildren financially, paying into a pension can get them off to a great start - it also means these investments are locked away for a specific time and purpose. And as a bonus, the government will even incentivise you to contribute towards their future. For every £80 you put in, they’ll add £20 on top (subject to certain limits).

Here’s everything you need to know about starting and investing into a child’s pension.

This article isn’t personal advice. When gifting money to a child it’s important to consider potential tax implications for the parent or person giving the gift. For example, whether the gift could come under current inheritance tax exemptions. If you’re not sure what’s right for you, please speak to a financial adviser. Money in a pension can’t usually be accessed until at least age 55 (which is set to rise in future). Pension and tax rules can change, and benefits will depend on individual circumstances.

The power of early investing

Investing small amounts regularly is likely to make a huge difference to a child’s standard of living in later life. It can really add up over time.

Let’s say you pay in £100 (including basic-rate tax relief) a month, from birth to age 18. If the pension investments grew by a steady 5% and the assumed annual charge was 1.25%, you could have built up a pension pot worth over £30,000. And even if no more payments were made the pension could be worth over £140,000 by age 60. That’s a whopping £110,000 just from investment growth across 42 years.

Of course, with investing nothing is guaranteed - values could be higher or lower than this based on the performance of the investments ultimately chosen and the charges that apply. The value of all investments can fall as well as rise so your child could get back less than the amount invested. Inflation will also reduce the amount of goods and services money can buy in the future.

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What are the tax benefits of junior pensions?

Junior pensions (like a Junior Self-Invested Personal Pension) offer some of the most generous tax perks around.

Each time you add money to a child’s account, the government automatically adds 20% on top into their pension - even if they don’t have any earnings. This means a contribution of £1,000 could be made up of an £800 payment from you and £200 tax relief payment from the government. Investments in a pension are also free from UK income and capital gains tax, so you can grow money without it being subject to those taxes. Another bonus is that any gifts to a child’s pension can reduce the value of your estate for inheritance tax purposes.

Remember though, pension and tax rules can change, and benefits depend on your and your child’s circumstances.

How much can you pay into a child’s pension?

If you pay into someone else’s pension, tax relief is based on the tax rate of the person whose pension it is. Even if they’re not earning, you can pay in up to £2,880 each tax year and they’ll receive 20% in tax relief from the government. This adds up to a total contribution of £3,600, which is the most that can be paid into any non-earner’s pension (including children).

If the child is earning, you should check their annual pension limit first to make sure your payment doesn’t take them over. For most people the annual pension allowance limit is 100% of earnings, up to £60,000.

Investing into a pension on behalf of someone else doesn’t affect how much you can invest into your own pension. To pay into a pension for someone else, they’ll need to open an account in their own name first. Or to open a child’s pension, a parent or guardian must open an account. With HL you can also manage your family accounts all in one place through linked accounts.

How to open a Junior Self-Invested Personal Pension

One option is to open an HL Junior Self-Invested Personal Pension (SIPP). It gives you more choice and freedom over where you invest than most traditional pensions. You can open or top up an account with a lump sum of £100 or start a direct debit from as little as £25 a month.

Once opened by a parent or guardian, anyone can add money to it. The account will also automatically convert to an HL SIPP once the child turns 18.

Tell me more about the HL Junior SIPP, including charges

Why choose the HL Junior SIPP?

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