In recent years, there’s been a huge rise in the number of families contributing to Junior Self-Invested Personal Pensions (SIPPs) on behalf of their children or grandchildren. Between 2017 and 2021, the amount paid into Junior SIPPs rose by 56% from £43 million to a whopping £67 million.
But why are families putting more of their money into a junior pension for their beloved children?
For grandparents who are looking to help secure the best financial future for a child, they offer a great long-term savings option. On top of this, they offer generous tax perks, including the ability to pass on money free from Inheritance Tax (IHT) charges. Below we take a closer look at how families could make the most of junior pensions.
This article isn’t personal advice. If you’re not sure what’s right for you, please ask for advice. Money in a junior pension is designed for a child’s retirement and isn’t usually accessible until age 55 (this will rise before the child reaches retirement). Pension and tax rules can change, and benefits depend on an individual’s circumstances.
Tax perks of a junior pension
One of the key perks is the 20% tax relief offered by the government on any pension payments. Together, friends and family can pay in up to £2,880 each tax year, and the government will add up to an extra £720 every year. This can really add up over time. Even putting in £100 (including tax relief) each month, for 18 years, could mean a child ends up with £21,600 towards their retirement even before any growth, from your contribution of £17,280. These figures assume an annual charge of 1.25%.
Actual growth will depend on the performance of the investments chosen by the child’s parents and those chosen by the child after they reach 18. Assuming a growth rate of 5%, by age 60, the junior pension could be worth £140,103 without further contributions. And, any money in a junior pension will grow free from UK income and capital gains tax. But remember there are no guarantees. Investments can fall as well as rise in value so the child could get back less than invested. Results don’t take inflation into account which will reduce the future spending power of money over time.
One of the less known tax benefits of paying into a junior pension is that you can pass on money free from IHT.
How can money be passed on free from IHT?
Each tax year, you can give away some of your money to help reduce your potential IHT liability. This is known as gifting. When money is paid into a junior pension it’s treated as a gift and could fall outside of your estate immediately, avoiding any liability to IHT. You can gift up to a total of £3,000 tax free each year, which covers the normal £2,880 you can pay into a Junior SIPP for one grandchild if you haven’t used this gifting allowance elsewhere. If you have more than one grandchild, you can split this between them.
You can also make 'gifts out of income' free from IHT. Any regular payments from your excess income that don't impact your standard of living are usually exempt from inheritance tax and could be used to make contributions to a Junior SIPP.
How junior pensions work
Junior pensions, like the HL Junior SIPP, need to be opened and managed by a parent or legal guardian until a child turns 18. But anyone can pay into a Junior SIPP on behalf of a child.
Then, any money that’s added to a Junior SIPP can be accessed at age 55 (rising to 57 in 2028 and likely to rise further). This means the money has a long time to potentially grow into a sizeable pot at retirement.
So, if you’re a grandparent, why not consider a Junior SIPP as part of your IHT plans? It can help you to safeguard your family wealth for future generations and gives the opportunity to help provide financial security for grandchildren. If you need help with inheritance tax planning, our expert financial advisers are on hand.