My partner and I have just had our first child and we’ve been showered with all sorts of wonderful baby gifts. However, we’re also keen to give our daughter a leg-up by saving into a Junior SIPP or a Junior ISA. Which one should we go for?
Simone (podcast listener)

Tom Selby, AJ Bell Senior Analyst says:

Paying into a long-term savings product might not be something a toddler, football-obsessed 10-year-old or grumpy teenager will thank you for today, but it can be an effective way to rocket-boost their finances.

By starting early, saving often and letting compound growth work its magic, even relatively modest monthly contributions can become a tidy nest egg by the time your daughter reaches her 18th birthday, in the case of a Junior ISA, or retirement in the case of a Junior SIPP.

HOW DO JUNIOR SIPPS AND JUNIOR ISAS WORK?

If your child is under 18 up to £2,880 a year can be paid into a Junior SIPP on their behalf and the Government will instantly top it up with a 25% bonus, to a maximum of £3,600.

Just like a regular SIPP, any investment growth the fund enjoys will be tax-free, with the money accessible when they reach the UK’s ‘normal minimum pension age’ (NMPA). This is currently set at age 55 and is due to rise to 57 in 2028, with further increases possible before your child gets there.

The tax treatment of withdrawals is also the same as a regular SIPP, with 25% available tax-free and the rest taxed in the same way as income.

Up to £9,000 a year can be saved in a Junior ISA, although unlike a Junior SIPP there is no upfront Government bonus.

Investment growth is tax-free, and your child can take over managing the account from age 16. They won’t be able to access funds until they reach their 18th birthday, at which point the Junior ISA will convert to a regular adult ISA. Any withdrawals they make will be tax free, but it’s important to note you will no longer have any control over what they do with the funds.

WHICH SHOULD I GO FOR?

Deciding whether to pay into a Junior SIPP or Junior ISA on your child’s behalf is tricky and depends in part on your priorities.

If you want to give them an easily accessible pot of money from age 18 which could be used towards a house deposit, for example, then a Junior ISA might be preferable.

However, if you’d prefer to look more long-term and turbo-charge their retirement savings then a Junior SIPP might be the best option.

And just like with regular SIPPs and ISAs, you might decide that a combination of a Junior ISA pot and a longer-term Junior SIPP pot is the most appropriate solution.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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