Junior pensions: what is a junior SIPP and how does it work?

You may not know that you can start a tax-efficient pension for a child (anyone aged under 18), which is known as a junior self-invested personal pension (SIPP).

This can be a good way to save for your child’s future, as it means pension benefits can build up over their lifetime (starting earlier than saving just from when they start work).

Discover more about junior pensions and SIPPs below.

Starting a SIPP for a child under 18

You can open a self-invested personal pension (SIPP) for anyone under 18. You can pay a maximum of £2,880 per year into this, which becomes £3,600 through 20% tax relief.

Why is it such good value at this age?

By starting early, you are making full use of the investor’s best friend: compound interest.

Here’s an example.

Sally opens a junior SIPP for her baby Rose soon after she is born.

She contributes the annual maximum of £2,880, which becomes £3,600 a year, and stops paying into it as soon as Rose turns 18.

Assuming no further payments by anyone and a steady 4% growth, then by the time Rose is 65, the pension pot will be over £583,000.

However, Sally paid in only £51,840 – so the total growth of over 1,000%.

Comparing SIPPs to an ordinary pension: what’s the difference?

Let’s suppose Sally doesn’t open a SIPP for her daughter and instead leaves Rose to start her pension at the age of 25. How does it compare?

Assume that Rose pays in the same amount each year (for comparison’s sake, we won’t factor in employer contributions).

She pays in £240 a month, which tax relief tops up to £300 (making £3,600 a year) until she is 65. She has contributed for 40 years and paid a total of £115,200. But what is her final pension pot? The final sum works out at just over £342,000.

This is £241,000 less than what she would have built up in a junior SIPP, yet it has cost her more than twice as much.

The total growth in her contributions this time is just under 200%. It’s still a lot, but much lower than the junior SIPP delivered.

Why start a pension for your child?

You may still hesitate to do this – you’re unlikely to be around when your child starts drawing their pension, and you’d rather help them financially when they’re younger.

But in effect, you would be. If your children know that they have a decent pension plan in place already, they should have more spending power for other things.

So by paying into a SIPP while your child is growing up, you could be indirectly helping them to buy their first property (for instance).

Another off-putting factor may be the extra expense – few new parents can afford to pay out an extra £240 a month.

But even if you only pay in a little, compound interest can still result in a sizeable pension pot by the end.

Just £10 a month from age 0 to 18 can result in a pension pot of over £20,000 by age 65 (around 900% growth).

What is the inheritance tax benefit?

There is another advantage to setting up this kind of pension for a child (or indeed grandchild).

Anyone looking to pass on assets to their family should think about inheritance tax.

You can of course give lifetime gifts to reduce the value of your estate, but anything over £3,000 in a year will be taxed if you die within seven years of making it.

A gift under £3,000 may not seem very much – but as a pension contribution it’s another matter.

If you pay into your grandchild’s SIPP, for example, you could pay the annual maximum of £2,880 and stay comfortably within the tax-free gift limits, while your gift would become £3,600 through tax relief.

This creates a nest egg for the child’s future, while at the same time reducing the size of your taxable estate, so you can pass on more to your children.

Get expert financial advice

A junior SIPP provides an excellent way to start building lifetime financial security for children from a young age, while allowing invested money to grow exponentially over a longer period of time due to compounding interest.

Junior pensions also enable you to pay into a child or grandchild’s account while staying within the tax-free gift thresholds, giving you an opportunity to build their futures while reducing your tax obligations. 

Let Unbiased connect you with a financial adviser who can help you establish a SIPP account for your children and ensure that they enjoy lasting financial security throughout their golden years.