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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Thinking about your child or grandchild’s ability to fund their retirement is a long way down the list of most people’s priorities. Saving for university fees and a house deposit are more pressing considerations for today’s debt-burdened youth, but there are lots of reasons why investing in a Junior SIPP (Self-Invested Personal Pension) makes sense.
Junior SIPPs benefit from tax relief even though children are unlikely to have paid any income tax. This means that by making small contributions you can help your child save for a comfortable retirement in their later life.
The ins and outs of Junior SIPPs |
| A Junior SIPP is opened by the child’s parent or guardian and held in the child’s name. |
| You can make annual contributions of up to £2,880 (net) on behalf of your child/grandchild and the government automatically adds up to £720 (20%) tax relief. |
| Most Junior SIPP providers have a regular investment service, which lets you make monthly contributions from as little as £25 per month. |
| You can choose from a wide range of investments, including shares, funds, investment trusts, exchange-traded funds and bonds. |
| There is no capital gains tax and no further income tax to pay on any investments held in a SIPP. |
| Parents, grandparents and other family members can make contributions. |
| Gifts are often covered by one of the inheritance tax exemptions and so could fall outside your estate for inheritance tax purposes. |
| Parents can use their two £3,000 annual gift allowances, which would cover the maximum annual pension contribution of £2,880 for each of two children. |
| The money cannot currently be accessed until age 55 (57 from 2028, and then increasing so it’s 10 years below the state pension age). |
| When the child turns 18 the Junior SIPP automatically converts into an adult SIPP and they can start making their own contributions. |
Access at age 57
One of the reasons many parents and grandparents like the idea of investing in a Junior SIPP is the money can’t be accessed by their child until they reach age 57. This means you can be fairly confident the money will be used for what you intended.
Tax relief
By investing in a Junior SIPP at birth your child could amass a considerable pot of money to fund their retirement. You can invest up to £2,880 a year for a child in a Junior SIPP, which will automatically be topped up to £3,600 by virtue of the government’s 20% tax relief (Correct as at Sept 2015). Even if you invested this amount just once, figures show that by the age of 65 your child could be looking at a pension pot worth £127,500, assuming a growth rate net of charges of 5.5% a year.
Pensions millionaire
If you’re able to make a lump sum payment of £2,880 a year for 18 years this would represent an outlay of £51,840 which would be grossed up by the state to £64,800. Assuming an average annualised return of 5% net of costs, this sum would be £106,340 by the time the child is age 18 – more than double what you put in.
If you ceased further payments the returns would continue to clock up. If the investments continued to return at an average rate of 5% a year for the next 47 years the pension could be worth a whopping £1.05 million when the child reaches age 65.
Emily Perryman
Written by:
Emily Perryman
Emily Perryman is Shares' personal finance expert and also specialises in writing about the leisure sector. She has eight years of journalism experience across a range of financial titles including IFAonline, Hedgeweek, ETF Express and Health Insurance & Protection.