Pension planning for toddlers

19 February 2022

A private members’ bill has been introduced to Parliament that would see the minimum age for auto-enrolment drop from 22 to 18, giving employees an extra four years of savings towards their pensions.

Think tank Onward, which supported the bill, claims that currently just one in five 16-21-year-olds has a workplace pension, compared to almost four out of five older workers. Onward estimates that by extending the age range covered by auto-enrolment, an 18-year-old in their first job could see their total pension savings increased by more than £33,000 by retirement if the change is introduced.

There is no guarantee that the Government will support these proposals, but for families wanting to start planning early it is already possible to take action to save for the retirement of even the youngest family member.

As we approach the end of the tax year, many people will be thinking about investments such as savings and pension contributions. As well as your own position, you may also want to think about support for other family members.

Pension contribution limits

In general, the amount of pension contributions an individual can make is the greater of earnings or unused annual pension allowance. The pension allowance itself is a maximum of £40,000, but this can be increased or reduced depending on the level of previous pension contributions made and earnings received.

However, it is possible to make a pension contribution of up to £3,600 a year even if the individual has no earnings, and this can have an impressive impact over time.

Tax benefits

Qualifying pension contributions benefit from a tax boost, which means that the actual cash contribution required to make the maximum £3,600 contribution for an individual with no earnings is only £2,880. Income and gains within the pension fund accrue tax-free, and over time the benefits of compound growth can be significant: if you contribute the full amount of £2,880 into a child’s pension every year from when they are born until they turn 18, this could potentially give them a pension pot valued at more than £700,000 in today’s terms by the time they reach 57 assuming consistent real net investment growth of 5 per cent a year.


Making pension contributions from a very early age can generate impressive returns but it has disadvantages. Under current legislation, the minimum age for pension withdrawals will increase from 55 to 57 from 2028, and pension ages could rise further in future. There is also a cap on the size of pension funds – currently £1,073,100 – above which tax becomes payable at 55 per cent where any part of the excess is paid as a lump sum (or is an unauthorised payment).


At present it is possible to contribute up to £9,000 a year into a Junior ISA (JISA), where the investment can grow tax-free in the same way as a pension fund. However, unlike pension contributions, JISA contributions do not get boosted by tax relief.

Also unlike pensions, the holder can make withdrawals from a JISA at any time once they reach age 18, which can be a good or a bad thing depending on the child.

Lifetime ISAs are also worth considering when saving for children: these can be great to build a deposit for a first home, but it is important to understand that they work in a different way and may impact on contributions to other ISA investments.

Annual allowances

All of these savings options are subject to annual allowances for the tax year, so this is the perfect time of year to consider making contributions to make sure that the maximum amount can be invested. You should speak to your financial adviser before making any investment decisions – RSM can explain the tax implications of your decision, but we do not give investment advice and an overview such as this can only act as an introduction to the subject, never a recommendation to act.

For more information, please get in touch with Andrew Robins, or your usual RSM contact.