The Junior SIPP – a tax effective investment for your child
If you’re looking for a way to save on behalf of your children, it’s likely that you’ll think of opening either a children’s savings account or a junior individual savings account, usually known as a Junior ISA or JISA. Whilst these can offer competitive rates, as well as being opened in your child’s name, there is another more tax-effective option available which is often overlooked: setting up a pension for your child. Although children don’t pay tax, they are still able to take advantage of the 20% tax relief on any pension contributions. As such, setting up a pension in your child’s name and making payments into it can be a remarkably efficient way of putting money away for your son or daughter as a long-term investment. Other benefits include potential gains from stock market returns over the decades, as well as ensuring your child won’t need to rely on a workplace pension when they’re older, which are currently not as generous as private pensions.
Those looking to go down this route take out a self-invested personal pension (SIPP) in their child’s name. A maximum contribution of £2,880 can be made annually, to which a further £720 in tax relief will be added by the government, making a total of £3,600 which can be saved tax-free each year. More can be paid in, but as it won’t benefit from the tax relief it makes sense to hold any additional savings back or invest them elsewhere.
Compounding returns will benefit any savings made into a Junior SIPP further. Taking the average annual return of 7% seen in the FTSE All Share index over the last century, a single lump sum of £3,600 paid into a SIPP on a child’s first birthday would have grown to £273,000 by the time they turned 65. If the same sum was invested when they were 25 years old, it would only grow to £54,000, further proving the benefits of investing in your child’s future as early as possible.
As with a Junior ISA, the child assumes management of the Junior SIPP when they turn 18; but unlike an ISA they’re unable to simply withdraw the funds, being required to wait until they turn 55 under the current pension rules. This can be seen as a benefit for those who want their child’s nest egg to simply sit and grow, but may mean a Junior SIPP is not the right option for those who want their child to be able to use the money for university fees or towards a first home.