Families could have collectively missed out on as much as £2.5bn in pension top-ups during periods of parental leave, research shows

Parents taking time off to look after their children could boost their pension pot by £720 a year by utilising a little known rule, experts have said.

A long-standing rule allows partners or relatives to pay up to £2,880 a year into the pension of someone who is not earning while looking after children.

HMRC automatically tops up that contribution by 25 per cent, handing families an additional £720 for the future.

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How does the top-up work?

Pension contributions automatically receive tax relief at the 20 per cent basic rate, which means for every £80 contributed, the Government adds £20, resulting in a total contribution of £100 – a 25 per cent boost on the amount paid in.

Every tax year, you can usually get tax relief on pension contributions up to 100 per cent of your earnings or £60,000 – whichever is lower.

If you earn less than £3,600 a year, you can get tax relief up to this amount of pension savings each tax year until you are 75 – this is equivalent to £2,880 of your money and £720 in tax relief.

This applies even if you are saving into someone else’s pension – for example, a working parent into a non-working parent’s pot – up to the £3,600 limit. The working parent’s own pension allowance is separate to the non-working parent’s pension.

According to the Office for National Statistics (ONS), the average age of a female parent is 31 years old, with the average age for state pension retirement being 66 years old.

Taking into consideration the 5 per cent UK pension return, the £720 figures would grow to approximately £3,970 over 35 years, whilst factoring in compound interest.

Experts say parents are unaware of benefit

Financial planners at Octopus Money, who carried out the research, say the benefit is often overlooked despite being available for more than two decades, and the top up can grow substantially over time through compound interest.

New polling from the firm shows that almost two thirds of the 1,000 parents surveyed said they had never heard of the rule. Many said they would have used it had they known earlier.

Estimates based on official population data indicate that families could have collectively missed out on as much as £2.5bn in pension top ups during periods of parental leave.

The lack of awareness comes at a time when parents report mounting financial strain. Almost half say day-to-day living costs are their biggest pressure, and more than half say becoming a parent hit their finances harder than expected.

A third reduced or paused their own pension contributions during parental leave and one in six stopped altogether, the research found.

The consequences are felt most sharply by women, who take the majority of career breaks to raise children.

Confidence in future retirement income remains low among women, with more than four in 10 saying they are not sure they will have enough to live on comfortably.

Analysts tracking pension pots across age groups say women begin their working lives level with – or slightly ahead – of men but fall behind quickly once parental leave and childcare responsibilities begin. By their late 50s, men typically hold about 40 per cent more in their pension pots.

Ruth Handcock, chief executive of Octopus Money, said families often do not realise how early decisions affect long-term security.

She said: “I can’t shout about this policy enough. It’s not just new parents: our coaches regularly hear from parents who say they wish they’d thought about pensions and parental leave earlier.

“That’s why we’re so focused on shining a light on these little-known rules: because the earlier you know, the bigger the difference it can make.”

Handcock strongly urges all new parents to think about financial planning in parallel with family planning – “to futureproof the whole family, not just the newest member”.