The number of families contributing to their under-18 year old children’s pension pots has soared from 25,000 in 2018 to 38,000 in 2021, according to research.
Data from Lubbock Fine Wealth Management showed that families poured £67.5m into the pension pots last year alone.
Görkem Gökyiğit, chartered financial planner at Lubbock Fine Wealth Management, said more families were taking advantage of attractive tax reliefs to start building wealth for their children.
Starting saving and investment early allows them to take full advantage of the power of compounding. Families who contribute just £240 per month into a pension from their child’s birth will give them a pension pot of over £100,000 by the time they are 18, assuming annual growth of 5% and received tax relief.
Gökyiğit said: “One of the best things a parent can do for their child is to start a pension for them as soon as possible, if they can afford it. They can have a large part of their retirement sorted by the time they turn 18.”
Pension tax relief can provide far better returns than Junior ISAs for the same contributions for under-18s. Contributing £240 per month to a Junior ISA from birth with 5% annual growth results in a pot of just £81,000 by the age of 18 – £19,000 less than with a pension.
Gökyiğit added: “Compounding is an enormously powerful force in investment. The longer you can make use of it, the better. Getting 18 years of compounding before your child even gets to university will be a huge benefit to them.”
Pension contributions are an increasingly popular choice for grandparents who want to give money to their grandchildren when their Junior ISA allowance has already been filled by their parents, Gökyiğit said,
In addition pensions are not accessible to the beneficiary until retirement, rather than at the age of 18 as with a Junior ISA, providing added reassurance for parents who fear that their children might spend a sudden windfall unwisely at such a young age.