Does paying into a Junior SIPP makes sense for you?

Paying into a pension for someone that’s likely 50 years from retirement feels often low on the priority list. But paying into a Junior SIPP is a growing trend among parents and grandparents. Not only does it set the child up for the future, but it’s an efficient way of keeping your savings out of the hands of the taxman.

A Junior SIPP is a pension account for someone under the age of 18. Up to £2,880 a year can be paid into a Junior SIPP on their behalf, and the government will instantly top it up with a 25% bonus, totalling a maximum of £3,600 in gross contributions.

The tax perks are the same as with a ‘normal’ pension: any investment growth on the pot will be tax-free, and the money will be accessible when your child reaches the UK’s ‘normal minimum pension age’, which is currently age 55 but due to rise to the age of 57 in 2028. This is therefore a very long-term savings product for your child, but with the perk of the government top-up, plus the long-term investment horizon, it can prove lucrative.

Why are Junior SIPPs gaining popularity?

Pensions used to be a popular way to pass down wealth, because they would not be considered as part of your estate for inheritance tax purposes. Instead, they would likely only face income tax after being passed down, given if the person passing down the pension died after age 75 or over.

Now, pensions are due to fall under inheritance tax rules beginning in April 2027, removing this exemption and making it a less attractive option for passing down wealth. However, Junior SIPPs provide a neat alternative: they allow someone to pass wealth down as a gift, knowing it will be part of their Junior SIPP so cannot be accessed until later in life. You can gift £3,000 each year free from inheritance tax. If you gift more than this amount, there’s a possibility it could fall under inheritance tax rules, but these will only come into effect if the gifter dies within seven years of making the gift.

How much could a child amass?

Let’s look at just making a one-off contribution to the Junior SIPP. If you paid £2,880 into the SIPP when a child is born, that will get topped up to £3,600 with tax relief. Even if you made that one off contribution and no more, assuming it made returns of 5% a year after charges, the child would have £58,000 in their pension pot at the age of 57. While that’s not going to be enough to retire on, it’s not bad for a £2,880 initial investment.

Let’s assume you keep up the contributions and save £2,880 for the child every year from birth to when they turn 18 and then leave the pot to grow with no further contributions. In this scenario the child would have a pot worth £713,000 when they reached 57, assuming 5% investment growth each year. That’s based on total contributions of £51,840 – showing the huge impact that both the government top-up and compound interest have on the growth of your pot.

But for many, putting £2,880 into a child’s pension consistently for 18 years wouldn’t be possible – particularly if there are multiple children.

So, if we dial down the expectations and a parent or grandparent puts away £100 a month, this will be topped up by £300 a year from the government. If they made this contribution from birth until the child reaches retirement, the pot would be worth £477,000 by the time the child is 57, assuming that same 5% investment growth each year. Even if a parent just made this £100 a month contribution for the first 18 years of a child’s life, they’d be left with a pot worth just shy of £300,000 at age 57.

The pros and cons of a Junior SIPP

The benefits of saving for your child in such a way are plentiful. Many young people are graduating with large amounts of debt from university and then face the challenge of saving for a deposit to get a foot on the property ladder. Providing a helping hand in the form of pension savings can be incredibly valuable to those young people trying to meet these challenges.

As the figures above show, such long-term savings have the potential to get the ultimate boost from compound interest, where your returns grow at a faster rate as you earn interest on interest.

But there are drawbacks to such a long-term savings vehicle too. First is that parents (or even grandparents) saving for their young relatives are unlikely to ever get to see the child reap the benefits of their hard work. It means that if part of the point of gifting is to see the child enjoy the money in your lifetime, you’re unlikely to get this satisfaction. On top of this, it might be that the child would get greater benefit from the money earlier on in life – to buy a property, pay for university or when they start a family, for example.

The second big risk is regulatory change. Because there is such a long period between when you gift the money and when they ultimately receive it, there is a lot of time for different governments and regulators to make changes to features or rules around pensions, like we are seeing now. You can’t predict what these will be, but they could have an impact on when your child can access the pot or the tax treatment of it, for example.