Saving & Investing for your children's future

The increasing costs of parenting

Giving your child a head start in life can be expensive.

Statistically speaking, the average cost of raising a child in the UK has gone up by 19% since 2012 for single parent families and 5.5% for couple families. The latest figures estimate that raising a child in the UK from their birth to their 18th birthday costs a single parent £185,036, while couple families stand at £150,582.

While the numbers above include rent and childcare costs, they exclude private education (which can be anywhere between £15k to £45k per year in fees), or any extras you might want your child to benefit from like sports, music lessons, or other extra-curricular activities.

The most recent annual report from CPAG points out that nursery fees for under 2s have increased by 47% while child benefits only saw a mere 3% increase.

Childcare costs unsurprisingly represent almost half of the total amount that parents spend on their kids  - but even once they turn 18 there may be other costs a parent may wish to cover or contribute towards.

If you wish to support your child through higher education, you’re looking at £9,250 per year (for an undergraduate degree). Not to mention living costs, which over a 3 year period can bring the total cost (including tuition fees) up to £70k in London. Whilst a student loan doesn’t work exactly the same way as other forms of debt, repaying it can easily become a daunting prospect to a child if parents cannot help in any way.

For many of us, buying our first home comes with a lot of sacrifice and debt. If you plan on helping your children get a foot on the property ladder, the average home deposit is now around £46k - an amount hard to accumulate for a young adult, especially those paying back student debt.

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How your goals & timeframes impact your financial plan

So you’ve decided you want to start seriously thinking about your child’s future and how to afford all the large costs you might face as a parent. Now what?

The first thing we suggest is thinking about why you’re doing this in the first place. While people normally associate saving & investing with “getting rich”, we feel saving & investing allows more than that.

It allows you to live the life you want and hit the goals you’re trying to reach.

With that in mind, we believe you should really think about what your goals are as not only does this increase your chances of sticking to whatever plan you come up with to reach them, but it also helps you decide on the right products to get there.

Short term goals (0-3 years)

Everyone has short term goals. Whether it’s paying for nursery fees, a family holiday (when the world is back to a semi normal state again) or anything else you might have on your mind, it’s likely you’ve got some that jump out to you.

Given that these tend to be a bit closer, it’s normally wise to not take any risk with that money and place it into an account that guarantees your money won’t go down.

This is why it’s generally best not to invest any money for short term goals.

You should also make sure that the account/product you use to save money for short term goals allows you to withdraw the money (at the time you need it) with no penalties. For example if your goal is in a year’s time, don’t place the money in a 3 year fixed rate account.

Medium term goals (3-10 years)

As a parent your medium term goals may be to fund private school fees (if your child is still young) or upgrading to a bigger house (if you plan to have more children in the future).

Medium term goals are probably the trickiest to solve for. This is because the length of time is normally long enough that you’re happy to take a little bit of risk on your money to help it grow and beat inflation, but also short enough that you want to protect that money from losing too much value if the market were to fall.

Long term goals (10 years plus)

The earlier you start planning for long term goals, the easier they are to reach. Whether it’s helping your child get on the property ladder when they’re older or covering their uni fees, starting the day they’re born (or as early as possible) gives you the maximum possible time to grow your money and reach that goal.

The general rule is that the more time you have to reach a financial goal, the more risk you can take with your investments (you can read up more about why that is here). For most people this means putting more of the money into stocks and shares and less into savings accounts and bonds.

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Disclaimer:

When investing, your capital is at risk and may go 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.

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Saving vs Investing for your child

Another thing you need to think about when setting money aside for your children’s future is whether to save or invest. There’s no easy way to decide this as it really comes down to your personal preferences but there are things you should think about such as your attitude to risk, the age of your child and the timeframe you’re putting money aside for (the last two are obviously related).

For the avoidance of doubt, in this post, when we refer to savings we mean putting money in an account (usually with a bank or building society) that pays a guaranteed interest rate. On the other hand, investing is when you put your money into shares or other financial instruments that do not guarantee a fixed rate of growth and whose value can go down as well as up.

How to decide whether to save or invest

Over long time periods, investing in the stock market usually outperforms saving in a bank account or savings account (but there’s no guarantee). So the younger the child is, the more likely that investing will outperform saving.

On the other hand, if you only have a short timeframe (let’s say for example your child is 17 already and they’ll need the money for uni fees next year), then the volatility (or unpredictability) of the stock market may mean it’s more sensible to save rather than invest. A general rule is you should not invest your money if you’re going to need it in less than 3 years (for example your child is going to use it to buy a house at 18 and they’re currently 16 years old).

Let’s take a look at a few examples to illustrate this. Firstly, let’s look at the performance of the MSCI All Countries World Index over the last 20 years (a good long-term indicator for the performance of the global stock market).

If you look at the performance from 2001 to 2020  you’ll see that it’s returned an average annual rate of 6.64% per year (excluding fees). That’s really high growth which we would all love to achieve every year. But if we look at it in more detail we can see that the index hasn’t actually grown by 6.64% a year. In some years it grew by more and some years it grew by less and even fell. The largest annual fall was in 2008 when it fell by nearly 42% that year and the largest annual gain was the year after (in 2009) when it increased by over 35%.

This is why investing should mostly be for the long term. If you had invested £10,000 for your 17 year old at the start 2008 to help with next year’s university fees, then that money pot would have been worth £5,815 just twelve months later (that same investment would be worth over £22k now for those who were investing for the long term and didn’t need to withdraw at end of 2008).

No one knows when these market drops will happen so usually the best way to manage them is to invest over a long time period and just ride them out as and when they happen. This is also the reason why as you get closer to the point that you need the money you should start moving it into less risky investments or maybe back into cash.

Difference between savings and investing

When you see a drop of 40% you might ask yourself, why would I take that risk and invest at all? The answer, as we said earlier, is simply because over the long term investments are much more likely to outperform savings and this outperformance makes a huge difference in how your money grows.

Today, the best junior cash ISA rate you can get in the market (according to an independent Hapi study) is the Coventry Building Society Junior ISA at 2.95%. Imagine you open an account with them today for your newborn and put £100 aside each month for them until they turn 18. At the age of 18 that account will have roughly £28,800 in it.

If instead that money was invested and grew at an average rate of 6.64% for the 18 years (i.e. the average rate of the MSCI All Countries World Index over the last 20 years), then the money would be worth over £42,000 on the child’s 18th birthday.

So while investing carries more risk with it (i.e. the value could go down or up), in our example the individual was able to make an extra £13.2k for their child over the 18 years. The other way of looking at it, is that instead of saving £100 per month, they would have only needed to save £68.50 a month to reach £28,800. That’s one extra Deliveroo per month for those that live in London, and considerably more if you live outside.

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.

Your name or your child’s name

Another important consideration when starting to put money aside for your child is whose name to put the money in - your name or your child’s name. This decision is bigger than you might think as it impacts a number of things about how the money can be accessed / used. At the highest level, putting money aside in your child’s name generally tends to be more tax efficient but less flexible than putting money aside in your name. For the purpose of this section, when we say “saving” we will mean both “saving & investing”.

Saving in your child's name

The most obvious approach when putting money aside for your children is to put it in their name. The largest benefit tends to be that money in a child’s name is more tax efficient. This is because children have their own tax allowances and products that they’re unlikely to be using, whereas you are more likely to be using up your own allowances already through your salary or your own investments.‍

Tax implications of saving in your child’s name

The tax allowances are a little complicated but in summary, if the money is gifted from you (the parent) then they’re allowed to earn £100 a year on interest/dividend income before paying any tax or £12,300 profit (e.g from sales of investments) before paying any capital gains tax (current allowances for 2020/21 but may be subject to change in the future).

If they’re likely to earn more than these amounts in the tax year, they also have the ability to use a Junior ISA which, in most cases, is tax-free.

Flexibility when saving in your child’s name

The other thing to bear in mind when saving in your child’s name is the access and control of those funds. As soon as the money is in your child’s name, it becomes legally theirs. This means it can only be used for their benefit (some products such as the JISA don’t allow you to use it at all before the age of 18) and on their 18th birthday the money becomes theirs to do with as they see fit.

Depending on your view, this can be seen as either a benefit or a drawback. On the one hand, it reduces the chances of you dipping into it to buy a new car or complete a house renovation increasing the chances of it growing to a meaningful sum that will really help your child in life. On the other hand, it means that, if they wanted to, they could spend it all on a huge party at the age of 18 (but hopefully we will have educated them well enough throughout their childhood to ensure that this doesn’t happen!)

Saving in your own name

Putting money aside in your name is the complete reverse of the above. It’s less likely to be as tax efficient but you’ll have more control over how and when the money is used.

Tax implications of saving in your own name

It’s likely that you are already using your personal allowance if you’re earning a salary and if you save / invest regularly you could also be using your savings and tax-free dividend allowance. To HMRC, this savings/investment pot is for you and so they will tax it exactly the same way they tax your other assets and earnings.

You could use your ISA allowance if you’re not already using it, but remember you can only contribute to one cash ISA and one stocks & shares ISA per year. This means that you’ll likely need to mix your money with the money you’ve earmarked for your child making it harder to monitor whose money is whose.

Flexibility when saving in your own name

As the money is in your name, you have full control of it. This means you can withdraw it whenever you want and spend it however you like.

The flip side of that flexibility is it becomes very easy to dip into the funds at any time and use them for something that’s maybe not as important as your children’s future (like the new Peloton bike). This tends to happen more often when the money is in the same account as your other investments and savings.

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 or each client and may be subject to changes in the future.

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Locking it up or keeping it flexible

By this stage you’ve hopefully read about the importance of having goals & timeframes when it comes to your finances and you may have also made a decision on whose name you want the money in and whether you want to invest or save it.

One of the final things to think about before diving in and selecting a product is the type of access you want to the money. If your goal is unlikely to happen before the child is 18 and you’ve decided to set money aside in your child’s name then you have an option to make.

Certain children’s products lock the money up giving you no access to the funds until the child turns 18. Before deciding on which approach to take here’s a few things to help you understand the differences between the two approaches.

Advantages of locking up the money

• Tend to offer better interest rates (if locked up in cash based products)
• Likely to be more tax efficient than easy access products

Advantages of retaining flexibility

• Can dip into it for one-off costs that come up (still need to be for the child’s benefit if it’s in their name)
• Allow you have more control over when the money is used
• No upper limit for the amount you can invest in a given tax year

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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 or each client and may be subject to changes in the future.

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The best child savings accounts in the market and what to watch out for

Teaching your children to save money is a good habit that can really pay off in the long run. It can be easy to instil the sense of value of money through junior savings accounts, which unlike adult savings accounts, can pay some nice interest.

There’s a catch though.

Junior savings accounts are usually used by banks to entice people in with this high (comparatively vs adult savings accounts) interest rate knowing that the majority of people forgot about an account once they’ve opened it and don’t switch. The restrictions placed are then usually designed to minimise the interest paid by the banks.

Here are a few things to check before opening a savings account for your child.

Is the rate fixed or variable

A fixed rate means that you’re guaranteed that rate and the banks can’t change it. A variable rate on the other hand can be changed at any time by the bank (providing they give you enough notice).

Fixed rate accounts are rare but you can find them for short periods of time (e.g. the rate is fixed for one year). An example of this is the Barclays Children’s regular saver that pays 3.50% interest for one year. This account though has a maximum contribution of £100 a month and so over the 12 months you actually only earn about £23 of interest. This type of “teaser rate” is sometimes used by banks to draw customers in with a rate that looks great on paper but isn’t actually as good as it sounds.

Does the rate drop depending on the balance?

Some banks have different interest rates depending on the balance. Some examples of this are the Lloyds Child Saver, Halifax Kids’ Saver and the Barclays Children’s Savings account. With these three accounts, the interest drops to 0.01% on balances above £5k (or £10k for the Barclays Children’s Savings account).

Taking the example of Halifax or Lloyds (who pay 1.45% on balances less than £5k and 0.01% on balances above £5k) shows that for a parent who contributes £50 a month from the day they’re child is born, the rate drops to 0.01% before the child’s 8th birthday. That becomes the 5th birthday if the parent contributes £100 a month. By then, in most cases, the parent has forgotten about that restriction and ends up building up a large pot of savings for their child earning 0.01% interest (and getting eroded by inflation). If you use one of these accounts make sure you don’t get caught out by it.

Can I withdraw as many times as I want

In most cases the answer to this is Yes, however the Nationwide future saver only allows one withdrawal per year. Any more than that and the rate drops to 0.05% for that period. If you’re likely to make regular withdrawals, this is unlikely to be the right account for you.

With all this in mind, the table below compares children’s savings accounts from some of the better known high street banks and building societies.

Other things to note about savings accounts:

• The money is in the child’s name meaning that it legally belongs to them and can only be spent on things that benefit them.
• At the age of 18 the child gets full access to spend the money as they wish.
• Grandparents can also open child savings accounts for their grandchildren providing they have proof of identity (like a birth certificate)
• Anyone can contribute to a child savings account
• If the money contributed is from a parent and the interest in any given tax year exceeds £100 (£200 if the money is contributed from two parents) then the interest is taxed as if it belonged to the parents.

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Disclaimer:

This article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice. Please note that tax treatment depends on the individual circumstances or each client and may be subject to changes in the future.

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All you need to know about Junior ISAs

If you’ve ever spoken to another parent about saving or investing for your children you’ve probably come across a Junior ISA (or JISA). It’s one of the most common ways to put money aside for their future but what exactly is it, and how does it work?

A JISA is a tax-free way to save or invest for children. This means that you don’t need to pay any income tax (on interest you earn from savings), dividends tax (on any dividends you receive from stocks & shares) and capital gains tax (on any profit you make) on your savings or investments.

Here are five things you should know about Junior ISAs

1. There are two types of JISAs

There are two types of JISAs, cash JISAs and stocks & shares JISAs. You are allowed to have a cash JISA and a stocks & shares JISA for your child but you’re not allowed more than one of each type. This means if you’ve already got a stocks & shares JISA with one provider, you can’t open up a new one with another provider (you can transfer though as mentioned later).

A cash JISA is normally provided by a bank or building society and works in a very similar way to savings accounts. You deposit cash and the Junior ISA pays a fixed interest rate back to you (this rate can vary so worth always making sure you’re on the highest possible rate).

A stocks & shares JISA is an investment account. This means that the money you put in buys stocks, shares and other investments. Because of this, the return isn’t guaranteed and whilst they tend to perform better than cash JISAs over the longer term, the value of the investments can sometimes go down as well as up.

If you haven’t already done so, you can read our earlier post for more information on the differences between saving & investing.

2. Only the parent or legal guardian can open a Junior ISA

If the child is under 16, then only the child’s parents or a guardian with parental responsibility can open the Junior ISA. This person then acts as the “Registered Contact” essentially meaning they’re the one responsible for managing the account, making sure it’s up to date with the latest contact information and informing the child when they turn 18.

Once a child turns 16, they can open their own junior ISA (if they don’t already have one open for them) and they can manage an existing Junior ISA that their parents opened for them. They can also open up a cash adult ISA (can’t open a stocks & shares adult ISA until they’re 18). This can be really useful if they’re maxing out their Junior ISA allowance already and want a larger tax free allowance.

Despite these strict opening rules, the rules of who can contribute to a JISA are more relaxed as anyone can contribute to a JISA providing the total amount contributed in a tax year is less than the annual allowance. This can be really useful when others (grandparents, godparents, aunts, uncles, you name it) want to chip in too. Not every provider allows contributions from non-parents so it’s worth checking the rules before you open an account. Here’s a list of some of the popular providers who don’t currently allow non-parent contributions.

3. Junior ISAs have an annual allowance limit

Just like an adult ISA, a JISA has an annual limit. This is the maximum you can contribute (pay in) in a given tax year. For this tax year (20/21) the limit is £9,000 but this can change from year to year so make sure you keep an eye on it.

This limit applies across both types of JISAs (i.e. if you put £3k into a cash JISA in a tax year, you can only put £6k into a stocks & shares JISA in the same tax year) and is per child. So if you can afford to, and you have more than one child, you can put £9k into each of their JISAs.

This limit is the maximum you can pay in for this tax year and with most providers there is no minimum contribution. If you wanted to, you could put in just £5. You can also choose how you contribute money to your Junior ISA - a one off payment, or a monthly direct debit.

4. Withdrawals are not allowed until the child turns 18

Except for extreme circumstances (e.g. terminal illness or death), all money in a Junior ISA is locked up and can’t be withdrawn until the child turns 18. This means that a Junior ISA is not an appropriate way to save/invest for short term goals such as nursery fees / private school fees etc.

When the child turns 18, the account will automatically change from a Junior ISA to an adult ISA. This means it can retain it’s tax-free status until the account is closed. At this point the child also has the option to withdraw the money for whatever they like, whenever they like, which means the parent(s) cannot control how the money they save up in a Junior ISA is ultimately spent by the child.

5. You can transfer a child trust fund (or existing JISA) to a new Junior ISA

The junior ISA was first introduced in 2011. Most children born before then (3rd January 2011) but after September 2002 would have had a Child Trust fund automatically opened up for them when they were born with a £250 contribution from the government. An additional £250 contribution was given by the government when the child turned 7. Child trust funds have since been scrapped but a huge amount of them still exist and they’re not always the easiest to manage (and can also have quite high fees).

You can transfer old child trust funds or existing Junior ISAs to a new provider. To do this you normally need to select the new provider you want your JISA with. Each provider has a slightly different process but it usually involves completing a form which asks you questions about your child trust fund (or current JISA). Once this is done the new provider will contact the old provider to arrange the transfer. The whole process can take anywhere from a week to 30 days depending on the providers.

What are the best cash Junior ISA rates available right now?

Currently, the best rate you can get in the market is 2.95% from Coventry Building Society. Out of the better known “high-street” banks, Santander is the lowest offering only 0.75%. However these rates are variable so be sure to check around before making any decision.

To help you picture the savings you could achieve through a Cash JISA we’ve included an example of the expected balance your child could have at 18 if you were to invest £100 per month for 18 years from when your child is born. This example assumes no change in interest rates for the 18 years (which is unlikely to happen) but it should hopefully let you see how even a small difference in interest rates can add up over 18 years.

A final thing you should know about cash JISAs is that they’re usually completely free to open and maintain and unlike savings accounts, the majority can be opened online.

What are the best stocks & shares Junior ISAs?

It’s a little bit harder to answer this question as they don’t offer a guaranteed rate of return (with stocks your value you can go up and down). So instead you should consider what your requirements are and find a provider that meets them. Here is a list of things that we think are important when selecting a stocks & shares JISA provider.

• Fees - this is one of the most important ones as they can add up over a long period of time. In general 0.5% to 1.0% (all-in pricing including fund charges) tends to be the market average at the moment so make sure you’re not over paying.
• Involvement - How involved do you want to be when selecting the investments. Do you want to pick the stocks and funds yourself (sometimes you have over 2,000 options to pick from)
• Active vs. Passive - Do you want a human (or software) to actively decide when to buy and sell certain companies based on their views? Or do you want an investment that tracks a specific index (e.g. the 100 largest companies in the UK). Actively managed investments tend to charge higher fees
• Sustainable investing- How important is it that your money is invested in companies that care about the environment, social and corporate governance as well as profits?
• Access for your partner - Given that this is your child’s money, do you want your partner being able to login and view the balance / manage the account as well without sharing the same credentials?
• Non parent contributions - Will grandparents, godparents, aunts, uncles etc. be contributing. Most providers allow this but a few don’t so be careful when selecting a provider if this is important to you.
• Minimum contributions - Is there a minimum amount that you have to contribute every month? Are you happy committing to that?

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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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An introduction to Bare Trusts

Another approach when it comes to saving & investing for children’s futures is a Bare Trust.

Like a Junior ISA, the Bare Trust is in the child’s name and they get full access to it when they turn 18. But, unlike a JISA, you can access the money anytime you like. The only limit is that the money needs to be used for the child's benefit. That’s why it can be a good option when you’re saving up for:

• Private school fees
• Music Lessons
• Sports camps

Or any other large cost for them which you have to cover before they’re 18.

Even though this flexibility can be really attractive for many families, a Bare Trust is not tax-free like a Junior ISA. This means parents might have to pay income tax or capital gains tax. This all depends on how much your investments grow in value or how much money is paid into the Bare Trust from your investments.

So how much tax do you have to pay? Well, it all comes down to a few factors. Let's go through each one.

But remember, if you're unsure about your own circumstances then it may make sense to speak to a financial adviser or an accountant.

Income tax on a Bare Trust

If the Bare Trust is set up by you as the child’s parent or legal guardian and you’re paying money into the Bare Trust, then whenever £100 or more of income is earned from your investments (think dividends) then that money will be taxed at the rate which you pay income tax e.g. 20%, 40% or 45%.  

If the Bare Trust is set up by someone else (think grandparents, aunts, uncles or godparents etc.) and they pay the money into the Bare Trust, then any income earned from your investments will be treated as your child’s income for tax purposes, meaning your child’s personal allowance limit (currently £12,500 for 2022/23) can be used to reduce the tax bill.

This is one of the reasons why a Bare Trust can be a good option for any grandparent or family member that wants to gift money to your child.

Capital gains tax on a Bare Trust

What happens when the investments grow in value and you sell them at a profit?

Well, all gains (“profit”) in a Bare Trust are subject to tax and treated as your child’s for tax purposes. Like adults, children have a capital gains tax (“CGT”) allowance each year and this year's allowance (2022/23) is £12,300. This means the Bare Trust will only need to pay tax on any gains made over £12,300 in a single tax year.

How likely this is to happen really depends on:

1. how much you’re saving for them each year; and
2. how much you withdraw in a given year.

Let's give you an example:

Let's say you contribute £65 a month from the day your child is born. If the money grows at 5%, then at the age of 18 you would have invested just over £14k and your balance would be just over £22.5k. In this example you would have made just under 8.5k, meaning even if you sold all the investments in one go you would not need to pay tax.

Want to learn more about Capital Gains Tax? Just take a look at the blog we wrote about that here for a few more examples.

How to open a Bare Trust

A Bare Trust is just a legally binding way of registering an investment you’ve made not for you, but for someone else. Because of this, it's a little more complicated to open than a Junior ISA and usually requires a solicitor or advisor to draft the legal agreements for you.

We've teamed up with Forsters LLP, a leading UK law firm which specialises in family planning and tax to simplify this process and digitise the creation of a Bare Trust. You can now do it in less than 20 minutes all from your mobile phone. If you're interested, you can sign up here.

Disclaimer:

Don’t forget, when you invest your money is at risk. You might end up with more than you put in - or you might end up with less. This blog isn’t our advice, so please don’t change your plans or buy or sell any of your investments based on it. We don’t know your money situation, your plans for the future or how much experience you’ve got. If you’re unsure you should speak to a professional financial advisor.

Please note that how you are taxed depends on your individual circumstances and may be subject to changes in the future. If unsure, speak to a qualified tax advisor.  

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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.

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.

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.