There are many ways that a parent or grandparent can help to secure a child's financial future. With children's savings accounts offering relatively poor rates of interest, more and more people are searching for other ways to help build a savings pot for their child. In this article we take a look at Junior SIPPs, explaining how they work and who should consider investing in a children's pension.
What is a Junior SIPP?
A Junior SIPP is a type of personal pension that is managed on behalf of a child by a parent or legal guardian until the child turns 18. It works in a similar way to a standard Self Invested Personal Pension (SIPP), giving investors the flexibility to manage how and where their money is invested. We explain more about how a Junior SIPP works, including the contribution limits and tax advantages in the next section.
How does a Junior SIPP work?
Investing in a Junior SIPP could help your child or grandchild on the way to building a sizable pension, potentially even securing their financial future leaving them free to concentrate on other financial goals such as building an emergency fund or saving for a deposit on a house.
Is there an annual contributions limit with a Junior SIPP?
Yes, the maximum gross contribution for a Junior SIPP is limited to £3,600 for the 2021/22 tax year. The contribution limit of £3,600 includes tax relief paid at 20% which means investors can contribute up to £2,880 each year, with £720 being paid in automatically by the government.
What are the tax benefits of a Junior SIPP?
There are numerous tax benefits when investing in a Junior SIPP. Firstly, contributions attract tax relief, paid by the government, at 20% on the total gross amount contributed. This means that your actual contributions are effectively boosted by 25%. So for every 80p you pay into a Junior SIPP, this is automatically topped up to £1.
Additionally, investments held within a Junior SIPP - just like any other pension - grow free of any UK income or capital gains tax. Those wishing to reduce their estate for inheritance tax purposes may also benefit from paying into a Junior SIPP, as gifts to children's pensions often fall under the inheritance tax exemption rules. If this is your intention then it would be wise to seek advice from an independent financial adviser.
Who can open a Junior SIPP?
Only a parent or legal guardian can open a Junior SIPP on behalf of a child. If the child is over the age of 16 then it may be necessary for the child to provide consent by signing the application.
Who can contribute to a Junior SIPP?
Anyone can contribute towards a Junior SIPP, meaning contributions are not restricted to parents and grandparents. Contributions of up to £2,880 can be made each year in addition to the 20% tax relief that is automatically applied by the government, totalling £3,600.
What happens to a Junior SIPP when your child turns 18?
Control of a Junior SIPP automatically passes onto the child when they turn 18, effectively converting the product from a Junior SIPP into a standard SIPP. This means that from this point on, they will be solely responsible for managing the pension, including how and where the money is invested. If you want to find out more about a standard SIPP and how it works, check out our article "What is a SIPP and how does it work?"
Can you transfer a Junior SIPP?
You can transfer a Junior SIPP to another provider if you wish, however, there are a few things that you should consider before making the transfer:
- does your current provider charge an exit fee?
- are there any other guarantees or benefits that you lose by transferring?
- have you checked and compared the cost, including dealing fees?
- how long will the transfer take?
- how does the provider's customer service compare?
- is there a wide investment choice?
At what age can you access a Junior SIPP?
Money in a Junior SIPP cannot be accessed until retirement and so the earliest it can be accessed under current pension rules is age 55. The government has submitted proposals to increase this to age 57 in 2028 in a bid to maintain the 10-year gap between the age people can access their private pensions and the state pension age.
Where can you invest in a Junior SIPP?
There are relatively few providers that offer a Junior SIPP but those that do include Fidelity, Hargreaves Lansdown, AJ Bell and Bestinvest. For more information on the best and cheapest Junior SIPP provider, check out our article "Best and cheapest Junior SIPPs"
If you invested £2,880 into a Junior SIPP each year (from birth until a child turns 18) it could be worth an estimated £420,000 by the time they reach age 60 (assuming a growth rate of 5% and annual charges of 1.25%)
Pros and Cons of investing in a Junior SIPP
Investing in a children's pension won't be right for everyone and so we provide a list of the pros and cons of investing in a Junior SIPP below.
- Investing in a pension for your child from such a young age can help teach them about the benefits of investing over the long term, including the positive effect that compounding has over time
- Investing in a Junior SIPP may help to set up your child for a comfortable retirement, potentially freeing up money during their early working life meaning they can focus on building an emergency fund or saving towards a house purchase
- Investing in a Junior SIPP can provide some inheritance tax benefits, particularly grandparents who are looking to reduce the value of their estate
- Control of a Junior SIPP automatically transfers to a child when they turn 18, meaning they become fully responsible for how and where the money is invested.
- It is entirely possible that you won't live to see your child benefit
- A Junior SIPP is a long term investment and the money is locked away until retirement with no way of accessing the funds earlier if needed
Junior SIPP alternatives
A Junior SIPP provides parents and grandparents with the opportunity to give children a head start with investing. Locking money away until retirement won't be right for everyone however and so we have provided a list of alternatives below that allow more flexibility when it comes to accessing the funds.
A Junior ISA can be opened by a parent or legal guardian and investors have the choice of opening a Cash or Stocks and Shares Junior ISA. There is an annual limit of £9,000 for the 2021/22 tax year and any growth is free from both income and capital gains tax. Any money held in a Junior ISA belongs to the child and they can gain access to the funds from the age of 18. See our article "Best Stock and Shares Junior ISA"
Children's savings account
There are a number of savings accounts that are specifically designed for children. It is worth comparing the best rates on offer by checking out our article "Best children's savings accounts" which is updated weekly. Most children's savings accounts have limits either on the amount that will earn interest or on the time period that the interest will be paid. Additionally, some accounts may penalise you if you decide to make a withdrawal, so make sure you do your research.
NS&I premium bonds
Any premium bonds bought in a child's name are managed by the parent or legal guardian until the child turns 16. Rather than paying interest, premium bonds offer savers the chance of winning tax-free prizes each month that range from £25 to £1m. The monthly prizes equate to a 'notional' interest rate of 1.00%. The prize pool was significantly reduced in November 2020, where the notional interest rate had previously stood at 1.40%, reportedly due to extremely high demand and the need to strike a balance between savers, taxpayers and the broader financial services sector. Premium bonds are backed by the HM Treasury, which means that 100% of the money held in premium bonds is protected.
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