A little-known pension perk offering a guaranteed 25% government boost is being overlooked by millions of families across the United Kingdom, new research suggests. While benefits like Child Benefit are widely recognised, this valuable allowance remains under the radar, potentially costing households hundreds of pounds each year.
How the Non-Earner Pension Allowance Works
According to data from Octopus Money, nearly two-thirds (63 per cent) of parents are unaware of a key pension rule. It allows anyone who is a UK tax resident to receive up to £3,600 a year (gross) into a pension, even with no earnings.
The mechanism is straightforward. A partner or family member pays £2,880 into the pension of the non-earner. The pension provider then claims £720 in basic-rate tax relief from HMRC, automatically boosting the total contribution to the £3,600 maximum. No paperwork or tax return is required.
This makes the allowance especially powerful for specific groups:
- Parents on maternity or paternity leave.
- Stay-at-home parents.
- Low earners.
- Children, whose pensions can be funded years before they start working.
Gary Smith, a senior partner in financial planning at Evelyn Partners, notes: “Many simply aren’t aware that pension contributions can be made for someone who isn’t earning, and that this triggers tax relief. That is the main reason the allowance isn’t used.”
Why Families Miss Out and the Long-Term Advantage
Awareness is the primary barrier, but financial pressure during parental leave, with priorities like childcare and mortgage costs, also plays a role. Interestingly, grandparents are often more active users of the allowance, leveraging greater financial capacity and appreciating the strict access rules compared to junior ISAs.
The long-term benefit, however, is substantial due to compound growth. “If someone has £1,000 and pays it into an ISA, £1,000 is invested. If they pay it into a pension, £1,250 is invested,” explains Smith. That immediate 25% uplift can snowball over decades.
To illustrate the power of starting early, Smith provides a compelling example. If the full £2,880 is contributed annually from a child's birth (becoming £3,600 with relief) into a pension growing at 5% net of fees, the pot could be worth around £105,200 by age 18. If left untouched until age 57, it could grow to approximately £736,400.
Key Considerations Before Starting
Families should weigh several factors before setting up contributions:
- Cashflow pressure: Parental leave often squeezes household income.
- Access rules: Pensions cannot be accessed until age 55 (rising to 57 in 2028).
- Debt priorities: High-interest debt or urgent mortgage costs should typically come first.
The simplest way to begin is to open a personal pension online or top up an existing one in the non-earner’s name. Be aware that processing tax relief can take six to eight weeks.
Smith advises that, due to the tax relief uplift, most should seek to invest the contributions rather than hold them as cash, especially for timelines exceeding five years. For those needing access within three years, a cash holding may be more suitable.
The clear takeaway is that if a household's income allows it, and one partner has little or no earnings, paying £2,880 to secure a guaranteed £720 government top-up could be one of the most efficient retirement planning moves available.
