Financial expert Martin Lewis has highlighted an often-overlooked savings strategy that could help grandparents provide long-term financial security for their grandchildren. The MoneySavingExpert founder has advised pensioners that they can open a pension for their grandchildren, allowing them to benefit from tax relief and long-term investment growth.
While many people focus on Junior ISAs or savings accounts for children, opening a pension at an early age could result in significant financial benefits later in life. With the cost of living rising and future generations facing uncertain financial prospects, Lewis suggests that starting early could be a powerful financial strategy—but only for those who can afford it.
How Can Grandparents Open a Pension for Their Grandchildren?
Most people associate pensions with working adults, but UK law allows parents and grandparents to set up and contribute to a child’s pension even if they have no earnings. This type of pension is typically a self-invested personal pension (SIPP) or a stakeholder pension, both of which benefit from government tax relief.
Martin Lewis explained in his latest MoneySavingExpert (MSE) newsletter:
“Did you know you can open a pension for your child (or grandchild)…”
He went on to emphasise the advantages, particularly in terms of tax relief and compounding growth over time. According to Lewis, almost anyone can save into a pension and get tax relief, even if the child has no income.
“Children can have pensions too! Almost anyone can save into a pension and get tax relief, even if they’ve little or no income. The minimum allowance is £3,600/yr (meaning it only costs you £2,880). This means even a newborn baby can get a pension.”
This means that for every £2,880 contributed annually, the government adds £720 in tax relief, bringing the total to £3,600 per year. Over time, with compound interest and investment growth, this amount could accumulate into a significant sum by the time the child reaches retirement age.
Why Start a Pension for a Child So Early?
One of the biggest advantages of setting up a pension for a child or grandchild is the long investment horizon. The earlier the pension contributions start, the more time the money has to grow, potentially resulting in substantial savings by retirement.
Lewis noted that some grandparents find comfort in the idea that the pension will serve as a lasting legacy:
“And indeed I know grandparents who open them for their grandchildren, liking the idea it’ll trigger a memory of them in 50 years’ time. The advantage of this is as the earlier you start, the more time it has to grow, so starting super young should be very valuable once your ickle ones are old ‘uns like me. It’s no surprise that more than a couple of kids of the parents in MSE Towers have pensions.”
The concept of starting early to maximise growth is a common strategy in long-term investing, and this applies to pensions as well. With contributions growing tax-free until retirement, even modest annual deposits can compound significantly over several decades.
Should Grandparents Prioritise Other Savings First?
Despite the clear benefits of opening a pension for a grandchild, Lewis cautioned grandparents to prioritise their own financial security first. While it may seem like a great idea to start a pension early, it should only be considered once other financial obligations have been met.
“However, I’d caution to always first look after your own finances, then look at top children’s savings and fill up a junior ISA, as they’re shorter-term priorities. Yet if you’re lucky enough to have enough to do that, then a pension for the children may be a good option.”
This advice highlights the importance of balancing financial priorities. Unlike a Junior ISA, which can be accessed at age 18, a child’s pension remains locked until retirement, making it a long-term commitment. Grandparents should therefore ensure they have:
- Sufficient savings for their own retirement and emergencies.
- Contributed to shorter-term savings options for their grandchildren, such as Junior ISAs or trust funds.
- Explored other financial support options, such as contributing to education funds or home deposits.
Is Opening a Pension for a Grandchild a Good Idea?
For financially stable grandparents, opening a child’s pension could be an excellent long-term gift that provides their grandchildren with a secure financial foundation. The combination of tax relief, compound growth, and early contributions can result in significant pension savings by the time they retire.
However, it’s important to consider individual financial situations. If a grandparent is still working towards their own retirement goals or wants to support their grandchildren in a more immediate way, alternatives such as Junior ISAs or savings accounts may be more appropriate.
As Martin Lewis emphasises, this is an option best suited to those who have already taken care of their own finances. While a child’s pension might not provide short-term benefits, it can serve as a powerful investment in their future financial wellbeing.
