Why Every Grandparent Should Start a Pension for Their Grandchild

A Junior SIPP (Self-Invested Personal Pension) is available for any child under eighteen. Grandparents, aunts, uncles, and godparents can all contribute, as long as a parent or legal guardian opens the account first. You can start with as little as £25 a month and contribute up to £2,880 per year.

The government automatically adds 25% on top of every contribution. Put in £2,880, and it becomes £3,600 before the money has done anything. Investments then grow free of income tax and capital gains tax. At eighteen, the grandchild takes over managing the account,  but the funds remain locked until the minimum pension access age, currently 55 and rising to 57 in 2028.

The government bonus is valuable. But the real power of a junior pension is what time does to the money once it is invested.

If you contribute the maximum from birth until the child turns eighteen and then stop completely, assuming 4% annual growth, that pot could be worth over £580,000 by the time they reach sixty-five. The total amount contributed to get there is around £52,000.

That gap between what goes in and what comes out is entirely down to time. Every year the account goes unopened is a year of compounding that cannot be recovered.

This is an illustrative example only. Assumes 4% annual growth. Actual returns will vary and are not guaranteed. Past performance is not a reliable indicator of future results.

For grandparents with larger estates, contributing to a grandchild's pension does two things at once. When you make regular contributions out of your normal income, and those contributions do not affect your standard of living, they can be treated as immediately outside of your estate for inheritance tax purposes, under the normal expenditure out of income exemption.

That means you are reducing the value of your estate today, while building a pension pot for a grandchild that could be worth hundreds of thousands of pounds by the time they retire. It is a rare combination, a planning tool that benefits both generations at the same time.

Tax treatment depends on individual circumstances and may change. This is not personal financial advice. Hoxton Wealth UK Ltd is authorised and regulated by the Financial Conduct Authority.