Many decades after the events of the first film, Wendy Darling is now grown up, married to a man named Edward, and has two children, Jane and Danny. With World War II raging, Edward leaves his family to fight, leaving Wendy to take care of the children. Jane becomes a very serious girl and, unlike her younger brother, refuses to believe in stories about Peter Pan and Neverland, referring to them as "poppycock". This ultimately leads to a furious argument with her mother and brother.
One evening, Wendy tells Jane and Danny that all the children in London will soon be evacuated to the countryside for safekeeping due to Nazi Germany's bombing of the city by the Luftwaffe. Later that evening, Peter's arch-nemesis, Captain Hook, and his pirate crew arrive on his pixie-dust enchanted ship and kidnaps Jane, mistaking her for Wendy, and takes her to Neverland, where they plan to feed Jane to an octopus in order to lure Peter into a trap. However, Peter rescues Jane, and Hook escapes from the disgruntled octopus, returning to the ship. After Peter learns that Jane is Wendy's daughter, he takes her to his hideout to be the mother of the Lost Boys as Wendy once was, but Jane refuses. The following day, as the boys fail to teach Jane about flying, she angrily snaps at them and proclaims her disbelief in fairies, causing Tinker Bell to not fly and her light starts to fade. This gives Hook an idea to lure Jane to him, and then kidnap Peter.
That evening, Hook finds Jane and promises her that he "wouldn't harm a single hair on [Peter's] head" if she helps him find treasure that Peter and the Lost Boys stole. Hook gives Jane a whistle to signal him when she finds it, and leaves. Jane asks Peter and the boys to play a game of "treasure hunt", and they teach Jane how to act like a Lost Boy, hoping to get her to believe in fairies and save Tinker Bell's life. Jane finds the treasure and changes her mind, discarding the whistle. The boys make her a "Lost Girl", before Tootles finds and blows the whistle, inadvertently alerting the pirates, who capture the boys and expose Jane as their accomplice. Jane tries to convince Peter that it was a misunderstanding, but Peter berates her for her deception and reveals that her disbelief in fairies is causing Tinker Bell's light to fade.
Horrified, Jane runs back to the hideout to find Tinker Bell's body. Jane is devastated, thinking the fairy is dead forever, but with Jane's new belief, Tinker Bell is revived. They head to the ship and see Hook forcing Peter to walk the plank. With Tinker Bell's help, Jane learns to fly. As Peter uses the anchor to sink the ship, the pirates, riding on a rowboat, are pursued by the octopus. After saying goodbye to the boys, Peter escorts Jane back home, where she reconciles with Wendy and Danny. Peter and Tinker Bell meet with Wendy again, then fly back to Neverland as Edward returns home and reunites with his family.