How to create a £1m pension fund for future generations

At a time when younger people are being urged to make savings to help maintain a comfortable standard of living during their retirement, many people may  wish to consider helping their children or grandchildren’s future pension funds from a much earlier stage in life.

The effects of making early savings for your child or grandchild’s future can be considerable, due to the impact of compounding returns, where a fund will significantly increase over a long period of time due to investment returns being applied annually. 

Everyone under the age of 75 is able to invest up to a maximum of £2,880 per year (net) into a pension and benefit from 25 per cent tax uplift, irrespective of whether they have any earned income. The result is £3,600 being paid into a pension plan annually.

This provides the opportunity for tax-efficient, long term investments for children by those parents or grandparents who can afford it. 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 – 65*.

This table illustrates the potential benefits of starting pension contributions at an early age.

Contributions of £3,600 per annum between ages - Potential Fund Value At Age 65*

0-16 then stopped £1,066,759

0-18 then stopped £1,143,520

0-21 then stopped £1,245,491

For comparison, contributions of £3,600 per annum between ages shown:

From 18-65 £673,291

From 30-65 £362,261

From 40-65 £193,209

From 50-65 £89,425

*These projections are based on an annual growth rate of 5.0% net of all charges, and are purely illustrative.

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. A financial planner would be able to explain the benefits and disadvantages of this type of savings approach and help you invest in the most appropriate way.