Everything you need to know when starting a pension for your grandchild


If you’ve spent your life accumulating wealth, it’s natural to want to give your loved ones a helping hand and the best start in life. Helping your loved ones is very emotionally rewarding, but it isn’t always immediately obvious which is the best way to do so.

If you want to help your loved ones but aren’t sure how, why not consider their long-term future and open a pension on their behalf? Read on to find out everything you need to know when starting a pension for your grandchild.

You can open a pension on behalf of a grandchild as soon as they are born

A pension may seem like an unusual gift for a grandchild, but an increasing number of people are investing in their loved ones’ financial future this way.

According to Aviva, official statistics suggest that there are around 20,000 people under the age of 16 who have a pension which is in receipt of contributions.

Setting up a pension for a grandchild is certainly the definition of “forward planning” and can be a great way of setting up their financial future.

You can start a pension fund on behalf of your grandchild as soon as they are born. Each year, you can pay in a maximum of £2,880 and the government will then top it up by a further 20%, bringing the potential annual contribution up to £3,600.

Due to government rules on Pension Freedoms, your grandchild won’t be able to access this fund until they’re at least 57, and this is likely to increase as state pension age rises in the future.

While your grandchild won’t be able to use the fund to buy a car or put it towards a mortgage deposit, the long timescale means that it has more time to grow. By the time your grandchild is old enough to claim it, it could have grown into a substantial amount.

Starting the pension early means it will benefit from decades of compound interest

One of the biggest benefits of opening a pension on behalf of a grandchild is that it will benefit from decades of compound interest.

Essentially, as the pension pot grows, the growth is reinvested. This can mean that the pension fund can grow considerably over a long period of time.

For example, if you deposited £1,000 in a pension fund which saw a steady 5% return, by the end of the first year the pot would have grown by £50. In the second year, the £1,050 in the pension would grow by £52.50, bringing it up to £1,102.50.

This might initially seem like a small difference, but as the growth gets reinvested it can grow to a considerable size in the long term. Given that your grandchild’s pension has at least 57 years to grow before they can access the money, it will have plenty of time for compound interest to take effect.

According to the Hargreaves Lansdown pension calculator, if you invested the full amount into your grandchild’s pension each year, by the time they were 60 the fund would contain £420,310, assuming a steady 5% growth rate and a 1.25% charge.

Speaking to an adviser can help you to gift without impacting your quality of life

Opening a pension on behalf of a grandchild can be a good way to give them financial stability when it’s their turn to retire. By the time they’re able to access it, it could have grown to a considerable size.

While this is a very admirable gift to a loved one, you should also stop to ask what impact it will have on your own finances.

For example, if you invested the full amount into a grandchild’s pension each month, as in the example above, it would cost you £64,800 by the time they turned 18.

Bear in mind that this is also for just one grandchild – if you want to give financial assistance to several loved ones then this cost would be significantly higher. Even if you can afford to give away this amount of money now, you also need to consider your future financial wellbeing.

Before you start giving away any money, you may benefit from seeking professional advice. A financial adviser can help you to determine how much you can afford to give without it impacting your progress towards your financial goals.

Get in touch

If you want to help a grandchild financially but want to ensure it doesn’t impact on your financial wellbeing, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.