Parents and grandparents who help fund a teenager’s first pension could help boost their retirement pot by over £100,000

New analysis from workplace pension provider Penfold shows that a modest contribution into a young person’s pension during their first few years at work could be worth tens of thousands of pounds more by the time they reach age 68, compared with someone who starts contributing later.

Under current rules, a workplace pension can be opened once someone begins paid work from age 16. Penfold’s analysis illustrates what happens if a parent or grandparent contributes £50 a month into that pension between ages 16 and 21, a total of £3,000 over five years, and the young person then continues contributing £50 a month themselves from age 21 to age 68.

Based on an illustrative average annual growth rate of 7% before allowing for fees and inflation, the resulting pot could be worth approximately £362,000 by age 68. That compares with an estimated £255,000 for someone who only starts contributing £50 a month from age 21 onwards, with no earlier contributions – a difference of around £107,000 attributable to the five-year head start.

Under current relief at source pension tax rules, a £50 monthly contribution attracts basic-rate tax relief of £12.50, meaning £62.50 is actually invested in the pension each month.

Chris Eastwood, CEO and co-founder of Penfold, said: “Most people don’t think about their pension until well into their working life, but the earlier those contributions start, the more time they have to potentially benefit from compound growth. A parent or grandparent contributing a modest amount during someone’s first few years at work can make a meaningful difference decades later, without needing to fund that person’s entire career.

“It’s important to remember these are illustrative figures, not a promise of what anyone will end up with. Investment growth isn’t guaranteed, and pension and tax rules can change considerably over a working lifetime, but the underlying principle, that time in the market matters, holds true.”

A workplace pension can be opened once a young person is in paid employment from age 16. Once open, parents, grandparents or other family members can contribute into the pension on the young person’s behalf, in addition to any contributions made by the young person or their employer.

Money paid into a pension is intended to fund retirement and generally cannot be accessed until the pension holder’s minimum pension age. Tax treatment, including the availability of tax relief on contributions, depends on individual circumstances, and pension and tax rules may also change.

Investing always involves some risk. The value of your investment can go down as well as up, but the longer you stay invested, the more potential your money has to grow.

Notes

Illustrative figures

*Tax-relief figures assume current 20% relief-at-source rules remain unchanged throughout the entire period. Tax treatment depends on individual circumstances and pension and tax rules can change.

Methodology

Penfold’s analysis assumes:

•     Contributions are made monthly from age 16 (the earliest age at which a young person could be in paid employment and have a pension opened) until age 68, a period of 52 years or 624 monthly contributions.

•     Contributions are made at the end of each month.

•     In the illustrated ‘head start’ scenario, a parent or grandparent contributes for the first 5 years (age 16–21, 60 months); the young person then contributes the same monthly amount themselves from age 21 to 68 (564 months), giving a total investment period of 52 years (624 months). The ‘starts at 21’ comparison scenario contributes the same £50 a month but only for the 564 months from age 21 to 68 – 60 months (5 years) less in total. That extra 5-year head start, funded by the family member, accounts for the £107,000 difference between the two scenarios: the earliest contributions have the longest time to compound.

•     The saver has no other relevant earnings and qualifies for pension tax relief under current relief-at-source rules.

•     A £50 payment therefore represents a £62.50 gross pension contribution: £50 paid in plus £12.50 of basic-rate tax relief.

•     Investment growth is compounded monthly using the monthly rate mathematically equivalent to the stated effective annual growth rate: (1.07)^(1/12) − 1 for the central 7% illustration, rather than simply dividing 7% by 12.

•     The future value is calculated using the standard future value of an ordinary annuity formula: monthly gross contribution × [((1 + monthly growth rate)^number of months − 1) ÷ monthly growth rate].

•     At 7% annual growth, £62.50 invested monthly for 624 months produces an illustrative value of £361,740.65. The comparison figure for someone starting at 21 (564 months) is £254,743.

•     For comparison, the table above also shows annual growth assumptions of 3% and 5%.

•     Figures are nominal and have not been adjusted for inflation. Amounts several decades from now would not have the same purchasing power as the equivalent amount today.

•     The figures are shown before pension or investment charges. Charges would reduce the eventual value of the pension, potentially materially over such a long period.

•     No withdrawals are assumed.

•     The calculations assume contribution amounts, tax-relief rules, minimum pension age and investment growth rates remain constant for illustrative purposes. In practice, all could change substantially over five decades.

Important information

•     These calculations are illustrations, not forecasts or guarantees. Investment returns can vary significantly and the value of investments can go down as well as up. You may get back less than is invested.

•     The 3%, 5% and 7% growth rates are hypothetical assumptions used to illustrate the effect of different rates of compound growth and are not predictions of future investment performance.

•     Actual outcomes will depend on factors including investment performance, fees and charges, contribution levels, and future tax and pension rules.

•     Tax treatment depends on individual circumstances and may change in the future. Pension rules, including tax relief and the age at which pensions can normally be accessed (currently 57), may also change.

•     The figures are nominal and do not account for inflation, meaning their purchasing power in the future would be lower than the equivalent amount today.