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Saving for your child’s retirement might not be your top priority right now, but opening a pension for your child has many benefits for their financial wellbeing and security. The earlier you start, the more time the money has to grow. It also helps in spreading your wealth across generations and supporting your future family. Additionally, with increasing life expectancy, planning for your family’s future becomes even more valuable.
When can you start a pension for a child?
A child’s pension, also known as a Junior SIPP, can be opened as early as birth. It’s never too early to begin contributing to your child’s pension. The sooner you start, the more opportunity the funds will have to grow. Even small, regular contributions can accumulate significantly over time, thanks to the power of compounding.
What are the rules? How does it work?
Only a parent or guardian can open set up a pension for a child. However, once its established, anyone can contribute, meaning grandparents, godparents, friends, and other family members can help too. All contributions are considered gifts, making them tax-exempt under your annual gifting allowance. This can also be beneficial for reducing inheritance tax.
When you child turns 18, all control passes to them. It is then their decision where contributions are invested.
Your child won’t be able to access any of the money saved until they reach the minimum withdrawal age, which is currently 55 but will increase to 57 in 2028.
How much can you pay into a child’s pension?
With a Junior SIPP, the contribution allowance for the 2024/25 tax year is £2,880. Thanks to a 20% tax relief from the government, this amount increases to £3,600. You have until April 2025 to take advantage of this tax benefit.
Contributing to someone else’s pension does not impact the amount you can save into your own.
What are the benefits of a child’s pension?
- Tax relief: with the Government top up of 20%, it gives your child an instant boost. If you contribute the maximum allowance each year, by the time your child turns 18, they will have accumulated nearly £13,000 just from tax relief.
- Compound interest: Compounding is a powerful investing concept that involves earning interest on top of the interest you’ve already accumulated from previous periods. This is highly beneficial for pension savers as it builds and grows over time. For example, contributing £40 a month into your child’s pension from birth (this increases to £50 with the government tax relief), the estimated value at the age of 60 is £70,051. This includes the total contribution at age 18 (£10,800) and the estimated growth (£59,251), assuming an annual charge of 1.25% and continuous investment from birth.
- Financial education: Opening a pension for your child provides an excellent opportunity to teach them about the importance of saving and planning for their future, instilling valuable financial habits early on.
What are the downsides of a child’s pension?
- Restricted access: The main downside of a Junior SIPP is the inability to access the funds until retirement. While some may view this as a good thing by ensuring long-term savings, it can be a limitation for those who may need the money sooner, such as for university fees or to buy a house. Only you can decide whether it is this is the right choice for your child.
- Investment risk: another disadvantage is the investment risk. Although the risk is relatively low, there is always a possibility that the value of your investments could decrease, resulting in a return that is less than the initial contribution. However, historically the stock markets have always recovered, and this risk is mitigated by the long-term nature of the investment.
What are the other options when saving for a child?
There are other options besides a Junior SIPP to save for your child’s future.
- Junior ISAs (JISA): this offers a tax-free way alternative to save for your child, similar to adult ISAs. You can choose to invest the funds in either cash or stocks and shares accounts. The maximum amount you can put into a JISA in the 2024/2025 tax year is £9,000. When your child turns 18, the Junior ISA will automatically convert into an adult ISA, allowing them to access their savings.
- Premium Bonds: this is essentially a lottery savings account. They offer the chance to win cash prizes through a monthly draw. The more bonds you hold, the higher your chances of winning. Prizes range from £25 to £1 million and are all tax-free. However, Premium Bonds do not earn interest, and there is no guarantee of winning. When your child turns 16, they will take over the management of their bonds.
- Child savings accounts: these are offered by banks and building societies, are similar to adult savings accounts. They provide quick access to funds and benefit from compound interest too. Child savings accounts are an excellent way to introduce your child to the concept of saving and allow them to watch their balance grow over time.
Need help? Get in touch
If you need any additional information or have a quick question, our Wealth Management team is just a phone call away. Please call us at 01904 655202 or email us at info@hghwealth.co.uk.
