You are contributing to a SIPP for yourself but have you thought about opening a Junior SIPP for your child? You may be saying to yourself ‘a pension account……. for my toddler?!’. And, ‘I’ve better things to do with my money right now’.
A pension account for your toddler….well, yes! The advantage is that your child won’t retire for another 50+ years giving plenty of time for compound interest to work its magic on any investments.
What is a Junior SIPP?
It’s a personal pension that you as a parent or guardian of your child can set up for them until they turn 18. Anyone can contribute to it once it has been set up.
How To Open a Junior SIPP
You must be a resident of the UK to open a Junior SIPP for your child.
Junior SIPP providers include AJ Bell, Hargreaves Lansdown and Fidelity. Choose the provider and complete, sign and submit the Junior SIPP application form. You must also complete a Legal Guardian form.
Note that if your child is over 16 years old they will need to provide consent by signing the application form.
8 Reasons to Set Up a Junior SIPP
1. Tax Relief on Contributions to a Junior SIPP
The maximum you can contribute each year is £3,600. However, it won’t cost you £3,600 because of the tax relief you get from the UK government.
You can contribute £2,880 (£240/month) to a Junior SIPP each year.
The UK government will provide 20% tax relief meaning they will contribute an additional £720. This brings the total to £3,600.
2. Compound Interest
Einstein said that compound interest was the 8th wonder of the world.
Here, because of how young your child is you can take advantage of it and make it work so that your child earns compound interest rather than pay it!
- Example 1 – Contributing £0 after aged 18
If you contribute the maximum of £3,600 per year from birth until your child is 18 years old @ 7% return, your child would have a pension pot of £101,591.
At this point, the pension would go into your child’s name. If your child doesn’t contribute another penny they could potentially have a whopping £1.4m when they retire and can access the account at 57! This should provide enough money for them to retire.
£0 contributions after the age of 18
£0 contributions after the age of 18
- Example 2 – Continuing to contribute £240/month after aged 18
If your child continued to contribute £240 per month @ 7% return, they could have a pension pot of almost £2m!
£240 contributions after the age of 18
£240/month contributions after the age of 18
The reality is that once your child starts working they will contribute more than the £240/month as they progress through their career.
As their income gets bigger they should also be able to claim a greater amount of tax relief from the government. And, if you add in potential employer contributions, then your child could have a very healthy-sized pension pot on retirement.
3. Pension Lifetime Allowance
The Pension Lifetime Allowance of £1,073,100 is being abolished from 6 April 2024 meaning there will be no tax implications if the pension grows to greater than this. However, this is subject to change depending on the UK government in power at the time.
4. Junior SIPP Investment Options
With a Junior SIPP, you have a variety of investment options to choose from such as index funds, exchange-traded funds (ETFs), individual shares, bonds etc.
You can also invest in different geographical areas such as the USA, UK, emerging markets, Europe ex UK etc.
You can choose what to invest in depending on your appetite for risk.
5. Flexibility
A Junior SIPP provides flexibility in that you can change or pause contributions. You can also change what you are investing in and even switch between providers.
6. Financial Security in Retirement
By investing in a Junior SIPP for your child you are securing their financial future in retirement by giving them a head start. As they can’t access the pension until they are 57 (from 2028) this gives the investments plenty of time to grow and compound and also to weather any financial storms.
7. Transferring Wealth
A Junior SIPP is a tax-efficient way of passing on wealth to your child. Contributions can be made by you as the parent or the child’s grandparents can contribute etc. You don’t have to pay any tax on these contributions.
Your child automatically gets control of the pension (though they will not have access to the money) at 18 with no tax liability due.
8. No Access to Pension Until 57 (from 2028)
Given there is no access to the pension fund until the age of 55 (57 from 2028), your child cannot access the money at an early age.
Therefore, there is no chance, as a financially irresponsible teenager or young adult that they can access all the money and blow it all on something ridiculous like partying in Ibiza for 4 months.
Lack of access means you are protecting them from themselves.
The Cons of Setting Up a Junior SIPP
1. No Access to Pension Until 57 (from 2028)
One of the pros of setting up a Junior SIPP is also one of the cons. Lack of access to the money can mean Junior misses out on using the money as a downpayment for a house, paying for university fees or setting up a business.
2. Investment Risk
Investment can go up as well as down and if you’re not careful you could potentially lose all of your money! So, although I use an average 7% return, it is an average and not guaranteed.
3. Fees and Charges on the Junior SIPP
You need to pay platform fees, charges for investing in the funds, transaction fees and potentially foreign exchange fees if you invest in foreign shares. These will all negatively impact your returns.
4. Tax
When Junior accesses their pension at 57 (from 2028), under current rules they can access 25% tax-free. However, they will need to pay 75% tax on the remaining pension pot. The amount of tax they pay depends on their circumstances.
Summary
Have you thought about investing in a Junior SIPP for your child? There are lots of good reasons to open a Junior SIPP and start investing as discussed above.
However, as with any investment vehicle, there are pros as well as cons to consider before you proceed.
Thanks for reading!
Have you invested in a Junior SIPP or are you thinking of opening one? Please share your experience or ask questions in the Comments section below. Or, are you considering opening one?
DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up-to-date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
