Maximising a child’s £3,600 annual pension allowance from birth to 18 could lead to a £1.14m fund by the time they hit 65, data from Towry has revealed.
Andy James, head of retirement policy at Towry, said many people may wish to consider helping their children or grandchildren’s future pension funds from a much earlier stage in life to ensure they have savings to maintain a comfortable standing of living during their retirement.
The effects of making early savings for your child or grandchild’s future can be considerable, due to the impact of compounding returns, where investment returns are re-applied annually.
Everyone under the age of 75 is able to invest up to a maximum of £2,880 per year into a pension and benefit from 25 per cent tax uplift, irrespective of whether they have any earned income.
Mr James said the result is £3,600 being paid into a pension plan annually. If this maximum is paid into a pension every year from birth until the age of 18, the result is a potential pension fund of £1,143,520 at age 65. The projection is based on an annual growth rate of 5 per cent net of all charges.
Contributions made during the first 18 years of life could be worth around double the equivalent contributions made by that individual during the years from 18 to 65, he added.
Mr James said: “The earlier a pension is started, the less pressure there is on the child once they become an adult to make their own personal pension savings, thus meaning any surplus income can be used to purchase a home, pay down a student loan, or to pay for the general costs of living.
“Of course, any additional contributions will further increase the potential fund value at age 65.”