Junior SIPPs - Not Your Typical Piggy Bank! Why I started a pension for my baby
A pension for a baby? Why it's never too early to start saving for retirement.
When it comes to investing for a child, a pension isn’t the first thing that comes to mind, but it might be something to consider.
I remember in my first job, being asked whether I want to opt in to the pension scheme. At the time, the thought of ‘losing’ a significant amount of my hard earned cash to stash away in a pension felt like a huge waste when pension age was several decades away and I could be enjoying the money now. I remember thinking; Will pensions even exist by the time I retire? What if I need access to my money? Surely, I can just opt in at a later stage in my career?! Thankfully I did go ahead and I’m sure I’ll be grateful when I get to retirement. Bring on the cruises!
When I started researching the ways I could save and invest for my child, I didn’t think I’d be planning for their retirement, but after learning about SIPPs from a family member, I decided it was a good option for us and hopefully by the end of this post, you’ll understand some of the benefits and why it might be something to consider.
WTF is a Junior SIPP?
SIPP stands for Self-Invested Personal Pension. A junior pension is a personal pension opened and managed on behalf of a child by a parent/guardian. The SIPP can be opened from the day a child is born and once the child has a SIPP, anyone (grandparents for example) can contribute.
Contribution limits
The junior SIPP limit is currently £2,880 per year but it benefits from basic rate tax relief (20%) which means that whatever you invest will be topped up by 20% by the government. If you were able to invest the full £2,880, it’ll be topped up by £720 - so the maximum total contribution each year is £3,600.
Who owns/manages a junior SIPP?
As their parent, you will need to manage the SIPP for the child until they turn 18. When they reach 18, control of the SIPP automatically transfers to them (yikes!) but unlike a Junior ISA, they can’t withdraw the money until they reach retirement age, currently 55 but increasing to 57 in 2028 so likely to be even higher for these future generations.
Why is a junior SIPP a good idea?
Long horizon for compounding
Money not accessible until child’s retirement - also a downside…
20% Tax relief
Great opportunity to educate your child about finances and long-term saving and investments early in life.
If you have used your personal ISA allowance (£20K), JISA allowance (£9K) and have money spare to invest.
Anyone can contribute - grandparents, family friends etc.
Less good points:
Money tied up long term - can’t access the money until the child retires.
As with any investment, there is risk of investment loss, though in principle, any short-term volatility should be mitigated over the long time horizon over which the money is invested.
The SIPP is designed to be proactively managed by the account holder so when control passes to the child, you’ll need to continue to support them until they have the knowledge and confidence they need to take on that responsibility.
Child gains control at 18.
How I’m using the Junior SIPP:
I decided to open a Junior SIPP with money that was gifted to my child. I’m not sure at this stage whether I will continue to contribute every year but I wanted to honour the gift and figured the most important thing was to open an account and get started.
Even if I add nothing more to it, the money in the account will benefit from compounding over a super long period - at least 57 years! Even with very conservative growth that’s going to be worthwhile.
Let’s look at some examples - if you added £1,000 to the account in the first year and left it there, you’d get £200 tax relief so there would be £1,200 in the account. Assuming a conservative level of interest at 4%, at 18 years old this could be worth £2,430 and by 57, £11,222.
Now, let’s say you were able to the full amount in that first year - £2,880, it would be topped up to £3,600 and using the same interest rate of 4%, at 18 could be worth £7,292 and 57, £33,666.
Last example, I promise...if you were able to add the full amount for the first 18 years of your child’s life, at 18 they might have £103,339 in their account and by 57 a whopping £580,251! Phew - lots of numbers…I’ve popped them in a table for easier reading:
One thing I did consider was what if I have more children - could I afford to do the same for multiple children? Honestly, I’m not sure, but I didn’t want it to stop me making a contribution and missing out on the opportunity for the money to be put to work.
For now, I plan to contribute something each year and if more children are in the future, then I will match the contributions for them, this might mean stopping/reducing my contributions to my first child’s SIPP.
Who offers a Junior SIPP?
There are fewer providers of Junior SIPPs than conventional SIPPs and other investment products but there is still a decent amount of choice. Providers offering Junior SIPPs include: AJ Bell, Bestinvest, Fidelity and Hargreaves Lansdowne. Some providers only offer Junior SIPPs to individuals who already hold an account with them.
When choosing your provider, look at their fee structure and also what is available for you to invest in. As an example, AJ Bell, Bestinvest and HL all apply the same charges to Junior SIPPs as to their adult SIPPs. Fidelity don’t charge a service fee on their Junior SIPPs but depending on how you invest the money there may be dealing costs.
If you are looking for ways to support your child or children in your life financially and help teach them about money, then hopefully this might have provided some inspiration for you to consider a junior SIPP as an option.
I’d be really interested to hear how you’re investing for the future generations around us whether that’s a SIPP, a Junior SIPP or something else. Whatever you have chosen I would love to hear more - drop me a comment below.
