As homes sparkle with lights and presents pile up, new analysis from Standard Life, part of Phoenix Group, reveals how redirecting even a small portion of festive spending into a child’s pension could deliver benefits that last far beyond this Christmas – giving them an early head start on their journey to retirement.
With UK households projected to spend around £1,626 this festive season, much of it on gifts, investing some of that money for the long term could turn short-term joy into decades of financial security.
If a parent, for example, invested £300 into their child’s pension every Christmas from birth until they reach the age of 18, they could build up a pension pot of £6,270 in today’s prices by the time their child reaches the age of 22, the age at which they would become eligible to be auto-enrolled into their own pension under the current rules. If grandparents were to match this – bringing the total to £600 annually – the pot could grow to £12,500 adjusted for inflation by age 22. For families able to contribute the maximum annual amount of £2,880, the child could have £60,100 by age 22, again adjusted for inflation.
Compounding for Christmas
Standard Life analysis finds that those who start working at 22 on a salary of £25,000 per year and paid the minimum monthly auto-enrolment contributions (5% employee, 3% employer) annually until 2026, could have total retirement fund of £210,000 by the age of 68, adjusted for inflation.
If that individual had a headstart in the form of a child’s pension worth £6,270 at 22 (£300 a month contribution), by retirement they could have a pot of £227,000, £17,000 more – thanks to the power of compound investment growth. The benefit could be even greater for those who had a £600 contribution from relatives (£12,500), with these people potentially ending up with a pot of £244,000 adjusted for inflation – £34,000 more.
Meanwhile, those with relatives who invest the maximum amount into their child’s pension (£2,880 annually) could have a final pot of £374,000 when they reach retirement, adjusted for inflation – £164,000 more than if they hadn’t had a child’s pension.
| Total retirement pot at 68* | |||
| No child’s pension, minimum pension contributions from age 22 | Child’s pension – £300 contribution, minimum pension contributions from age 22 | Child’s pension – £600 contribution, minimum pension contributions from age 22 | Child’s pension – £2,880 contribution, minimum pension contributions from age 22 |
| £210,000 | £227,000 | £244,000 | £374,000 |
| +£17,000 | +£34,000 | £164,000 | |
*assuming 3.50% salary growth per year, and 5% a year investment growth. Figures allow for 2% inflation. Annual Management Charge of 0.75% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied.
Inheritance tax planning benefits
Beyond giving children a financial head start, contributing to a child’s pension can also support wider estate planning. From April 2027, unspent pension pots are expected to fall within the scope of inheritance tax, making proactive gifting strategies even more important. Regular contributions to a child’s pension can qualify as exempt gifts under HMRC’s ‘normal expenditure out of income’ rules, provided they are made from surplus income as part of a settled pattern and do not affect your standard of living. It’s important to keep clear written records to evidence this pattern and source of funds, making sure the exemption applies. Done correctly, these contributions can be immediately outside your estate for IHT purposes, combining long-term financial security for the next generation with potential tax advantages.
Mike Ambery, Retirement Savings Director, Standard Life said: “A child’s pension might not be the most exciting Christmas gift, and it doesn’t offer the instant thrill of unwrapping a toy, but it can be one of the most valuable and a gift that keeps on giving for decades.
“With life expectancy rising and financial pressures mounting, it’s increasingly challenging for younger generations to prepare for their own retirement. If you’re able to, paying into a child’s pension provides a tax-efficient way to give them a head start and benefit from compound investment growth from the earliest moment possible. Once the child pension is set up, anyone can contribute – parents, grandparents, even friends.
“Contributions can also help to reduce the value of your estate for inheritance tax purposes, often falling under exemptions for regular gifting. It’s a good way to support a child’s future while helping with your own tax planning.”
Mike Ambery discusses the key attributes of a child pension:
How does it work?
“A child pension can be set up for anyone under 18. You can pay up to £2,880 each year, and eligible contributions receive a 20% government boost so in reality, £2,880 becomes £3,600 invested.
Who can pay into them?
“A parent or guardian must set the child pension up, but once this is done anyone can pay in, meaning grandparents, godparents, other relatives or friends can also contribute. The only thing to watch out for is that the annual allowances aren’t exceeded.
When can a child access their funds?
“A child can take control of their pension plan from age 18, at which point they can make any decisions themselves, such as where they want their pension contributions to be invested, but the funds cannot be touched until they reach minimum pension age (57 from 2028).”
