Invest into a pension for your children

9 January 2019

You could make your children adult millionaires by starting a pension pot when they are born.

Children born this year could become millionaires by their 43rd birthday if their families contribute to a pension for the first 18 years of their lives[1]. The analysis found that parents or grandparents contributing £2,880 per year (£3,600 after tax relief) until their children turn 18 years old could create a pot of £1,021,837 by 2061. The figure assumes a total contribution of £51,840, a growth rate of 8% per annum, and is net of product charges.

Whilst the assumed growth rate may seem high, data from Moneyfacts, the comparison website, showed that average returns from pension funds were 10.5% in 2017 and have seen double-digit growth for six consecutive years. While lower growth rates reduce the return, they would still leave children with a substantial pot of cash to help them retire. Average growth rates of 2% and 5% mean that, by the time the child reaches its 55th birthday (2073), they would have a pot of £171,086 and £668,592 respectively.

On an average 5% growth rate, the child would be a millionaire by the time they retire in 2083 (65 years old), with a pension pot of £1,089,067. By the same milestone, a growth rate of 8% would create a pension pot of £5,555,260.

Previous research found that very few people would consider contributing to a loved one’s pension – only 2% of over-55s said they would support a relative by putting money into a pension fund. By contrast, 68% said they would leave their family an estate when they pass away, compared with 34% who would help their family with ongoing gifts of any kind.

Compounding Interest

Despite its obvious advantages, contributing to a family member’s pension is one of the last thoughts to cross the majority of people’s minds. Yet, provided growth rates remain at current levels, it could make a millionaire of a child born today. It’s the power of compounding interest in action.

One of the biggest obstacles to passing on wealth tends to be the parents or grandparents worrying that their younger family members will ‘waste’ the money on frivolous purchases. But, pension contributions guarantee that their children won’t be able to use the proceeds until they are pensionable age.

Pensions are tax efficient ways to pass on wealth

Making regular contributions to a child’s pension may not seem like the obvious choice. However, given the flexible nature of pensions and the tax relief offered by the Government, they can provide a very simple way of securing children’s financial future in retirement.

Saving for a child today is a wonderful gift for their future. There’s no time like the present to take steps towards make the most of retirement savings for your children. To discuss your options, please contact Chris Slatter on cslatter@ellacottswealth.co.uk or 01295 250401.

[1] Figures taken from Brewin Dolphin’s ‘Mind the generation gap’ research, which included a detailed survey of 11,000 people. 

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.