Junior SIPPs: A tax efficient way to fund your child’s retirement

Like adults, children can have pensions too. For children, the type of pension is known as a Junior SIPP (self-invested personal pension) and works similarly to the way an adult SIPP would. While saving for your child’s retirement might not be the first thing that comes to your mind when you think about investing for their future, it can be very tax efficient so shouldn’t be immediately discounted.

Here are four things you should know about Junior SIPPs and how they work:

1. Only the parent or legal guardian can open a Junior SIPP

Child pensions are similar to child ISAs in the sense that you need to be the parent or legal guardian to open one up for the child. 

Up until the age of 18, the pension is managed by the parent and they’re responsible for how it’s invested as well as ensuring all the details are correct. At the age of 18, the pension becomes the child’s responsibility to manage as they see fit.

Like a Junior ISA, a Junior SIPP can receive contributions from anyone provided it doesn’t exceed the annual limit.

2. Junior SIPPs have an annual limit

Just like an adult pension, a child pension also has an annual limit except theirs is much smaller. You can contribute up to £2,880 each tax year (current limit for 2020/21 tax year) tax efficiently. The government automatically pays a 20% tax relief (up to £720) to reach the annual limit of £3,600. 

Technically speaking you can contribute over £2,880 but you won’t receive any government top up on contributions above that amount.

Example annual government top-up for different contributions amounts for a Junior SIPP

3. The money is completely locked up until the retirement age

Currently you can usually only access your pension when you’re 55 years old. A child pension works in exactly the same way and the child can only access it when they reach 55 years of age. This number is expected to rise to 57 by 2028 and probably even further by the time your child reaches retirement. If you’re thinking of opening up a child pension be very sure that the money won’t be needed before then.

4. You can transfer Junior SIPPs from one provider to another

50-60 years is a very long time and who knows if the provider you opened your Junior SIPP with will still be the best one in the future. Just like most investment products, you can transfer a Junior SIPP and this is usually free of charge.

You normally initiate this request with the new provider and once you give them the information, they handle the process for you by contacting your old provider and arranging the transfer.


Could you build a £1m pension pot for your child?

If you contribute the full £2,880 each year for the first 18 years and the investments within the Junior SIPP grow at 5% a year, then the pension will be over £1m by the time your child turns 65 (as with all investments the value of your investments can go up as well as down). 

If this happens, this £1m would have been created from just £51,840 of parent contributions and £12,960 of government tax relief. The rest would come from assumed positive investment returns and compound interest (i.e. the growth or interest from your investments earning more growth/interest every year). 

Obviously 5% growth is just a hypothetical figure so here are a few more examples for other growth rates to help you understand how this works. Given the long time frames we’ve only shown positive growth rates but while it’s very unlikely over a 65 year time frame, the value of your investments can go down as well as up.

This example is for illustrative purposes only and not a projection of what your investment product will be worth.

Disclaimer:

When investing, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment. This article should not be read as personal financial advice.  Individual investors should make their own decisions or seek independent advice. Past performance isn’t an indicator of future performance.

 Please note that tax treatment depends on the individual circumstances of each client and may be subject to changes in the future.

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