How saving £100 a month can give your child a £477,000 pension

Paying into a pension for your offspring might not be the first thing that pops to mind when you have a child, but putting a little bit away for your kid could have a huge impact on their financial future.

A Junior SIPP is a pension account for a child. If your child is under 18, up to £2,880 a year can be paid into a Junior SIPP on their behalf and the Government will instantly top it up with a 25% bonus, to a maximum of £3,600.

The tax perks are the same as with a normal pension: any investment growth on the pot will be tax-free. And the money will be accessible when your child reaches the UK’s ‘normal minimum pension age’, which is currently age 55 but due to rise to the age of 57 in 2028. It means that this is a very long-term savings product for your child, but with the perk of the Government top-up plus the long-term investment horizon it can prove lucrative.

How much could you amass for your child?

Let’s look at just making a one-off contribution to the Junior SIPP. If you paid £2,880 into the SIPP when your child is born that will get topped up to £3,600 with tax relief. Even if you made that one contribution and no more, assuming it made returns of 5% a year after charges, your child would have £58,000 in their pension pot at the age of 57. While that’s not going to be enough to retire on, it’s not bad for a £2,880 initial investment.

Let’s assume you keep up the contributions and save £2,880 for your child every year from birth to when they turn 18, and then leave the pot to grow with no further contributions. In this scenario you’d have a pot worth £713,000 when the child reached 57, assuming 5% investment growth each year. That’s based on total contributions of £51,840 – showing the huge impact that both the Government top-up and compound interest have on the growth of your pot.

But for some parents, putting £2,880 into their child’s pension won’t be possible for 18 years – particularly if they have multiple children or are also saving for their child elsewhere, in another investment account for example.

So, if we dial down the expectations and a parent puts away £100 a month, this will be topped up by £300 a year from the Government. If they made this contribution from birth until the child reaches retirement, the pot would be worth £477,000 by the time the child is 57, assuming that same 5% a year investment growth. Even if a parent just made this £100 a month contribution for the first 18 years of a child’s life, they’d be left with a pot worth just shy of £300,000 at age 57.

The pros and cons of a pension

The benefits of saving for your child in such a way are plentiful. As defined benefit, otherwise known as final salary, pension schemes become a rarity, young people face a greater challenge in saving enough to supply a decent income at retirement.

That is particularly true when you consider that many young people are graduating with large amounts of debt from university and then face the challenge of saving for a deposit to get a foot on the property ladder. Providing a helping hand in the form of pension savings can be incredibly valuable to those young people trying to meet these challenges.

As well as that, as the figures above show, such long-term savings have the potential to get the ultimate boost from compound interest, where your returns grow at a faster rate as you earn interest on interest.

But there are drawbacks to such a long-term savings vehicle too. First is that parents (or even grandparents) saving for their young relatives are unlikely to ever get to see the child reap the benefits of their hard work. It means that if part of the point of gifting is to see your child enjoy the money in your lifetime, you’re unlikely to get this satisfaction. On top of this, it might be that your child would get greater benefit from the money earlier on in life – to buy a property, pay for university or when they start a family, for example.

The second big risk is regulatory change. Because there is such a long period between when you gift the money and when they ultimately receive it, there is a lot of time for different Governments and regulators to make changes to features or rules around pensions. You can’t predict what these will be, but they could have an impact on when your child can access the pot or the tax treatment of it, for example.