For many parents, providing a degree of long-term financial security to their children is one of their main priorities. Funding for further education, a deposit for their first home, a nest-egg for their wedding day – there are many life events that parents save money for on behalf of their children. But what about their retirement?
The thought of parents contributing to their children’s pensions might seem odd to some. Why, you might ask, would you lock away money for them until they are 50, when there are so many more immediate reasons they might need it? Yet it is surprisingly common, with many junior self-invested personal pensions (SIPPs) available in the UK.
So, how does a junior pension work, and what are the pros and cons of investing in one?
How does a junior SIPP work?
Child pensions are tax-efficient options for putting aside money to give your offspring a financial head-start as they get older. A junior SIPP follows a similar model to an adult version; the money is invested in a variety of assets and benefits from tax relief. However, there are some differences.
With an adult SIPPs or personal pensions, the holder can invest as much as 100% of their earnings each year, and can receive relief on their contributions up to a ceiling of £40,000. A junior SIPP, meanwhile, currently has a maximum allowance of £2,880 – that is to say, this the most that a parent could invest into the junior SIPP each year, with the child then benefitting from 20% tax relief on top of this, taking the total to £3,600.
They can be started for anyone under the age of 18.
The pros and cons
There are numerous reasons for and against a junior SIPP. On the one hand, parents are often eager to build up a retirement fund for their children – after all, the majority of Britons in full-time work say they regret not saving into their pension early enough. A junior SIPP will ensure that children do not fall into the same trap.
The tax benefits, over many years, also provide an attractive option to slowly build a nest-egg. Junior SIPPs are often flexible, too – the holder can invest from as little as £20 a month, and they can make their investments as either regular instalments, or sporadic lump sums.
Furthermore, as with many investments that are made over such a long period of time, a child pension stands to benefit from a serious amount of compounding, as well as tax relief. This means the amount eventually passed down could significantly surpass the amount the parents have themselves invested.
However, there are potential downsides, too. Perhaps the most notable of these is the fact that a child pension cannot be accessed until they reach the age of 57 – and this could change in the future. Some parents enjoy this fact, as it avoids the risk of the child spending the money rashly at the age of 18, for instance. Yet if they are struggling to get onto the property ladder or have a sudden need to access the money sooner, they might be far less grateful about having a retirement fund locked away.
Parents must also be careful not to over-commit financially to a child’s pension if their own retirement finances are not in good health, or if they need the money themselves in the short-term.
As with any financial decision – particularly one that involves long-term investments – it is vital that people seek advice. An independent financial adviser can assess all elements of an individual’s financial circumstances and offer guidance on the products, savings and investments best suited to their situation.