Child Taxation: 10. Children's Pension Plan

A child is eligible for a pension plan to be opened on their behalf from birth.  It is only the parents or legal guardian that can open a pension for a child but anyone can then pay into that pension plan.

The maximum yearly contribution for a non-earner including children is £3,600pa gross.  Pension contributions attract basic rate (20%) income tax relief at source meaning a maximum of £2,880 pa can physically be paid in and then the pension provider collects the tax relief balance from HMRC i.e.  £720 and automatically adds it to the pension plan making it up to £3,600.

Pros of a Child Pension:

• Free money i.e.  the tax relief of up to £720pa.
• Tax free growth.
• Tax free cash lump sum when they come to draw their pension..

Cons of a Child Pension:

• Earliest access is not until age 57 (from 2028) meaning a child may have to wait 50+ years to accesses their pension.
• Income is taxable when they draw pension and may be detrimental if a child (then adult) pays higher rate taxes already.
• The lifetime allowance (the maximum amount you can build up in pension plans) my not have changed that much over the coming years so starting a pension early for your child may exacerbate the position (it’s a nice problem to have though – i.e.  your pension is too big).

Balance

We suggest children’s pensions are a great way to save for children but other savings options should be prioritised over pensions such as Junior ISAs as it may prove difficult if a child needs funds in their 20’s say for university, cars, weddings or house deposits.  It is a balance between financial needs in the early years and longer term retirement planning.

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