Financial planner urges parents to open key pension account

Numerous parents and grandparents throughout the UK could assist in securing funds towards their children and grandchildren's future. Data shows that pension contributions for under-18s rose to £79.6m in the year to 5 April 2023, up from £75.9m the previous year, according to the latest figures fromHMRC.

Rowan Harding, a financial planner at financial advice firm Path Financial, explained that families can establish a Junior SIPP for under-18-year-olds and start putting aside thousands each year for their retirement. With a growing number of young people dedicating more time to saving for items such as university, property ownership, and childcare expenses, it can be simple to overlook the financial considerations of the later stages of their lives.

Data shows that pension contributions for under-18s rose to £79.6m in the year to 5 April 2023, up from £75.9m the previous year, according to the latest figures from HMRC.

Setting up and paying into a Self-Invested Personal Pension (SIPP) or another child pension is also a method parents can use to invest in their children's futures.

What is a Junior SIPP?

"It's a tax-efficient way to build a nest egg for your child or grandchild, and once they are opened by a parent or guardian, absolutely anyone can contribute," says Rowan. "Then, once the child turns 18, control of the pension moves to the child to choose how they want it to be invested, and they can have the freedom to choose options such as green pensions if they want to.

"So you're not only giving your child a very valuable monetary gift, but also the gift of financial knowledge and the ability to choose where their money goes."

How does it vary from an adult pension?

Children's pensions benefit from the same advantages as adult versions, with no tax liability on investment income or capital growth within the pension, provided they remain within the Annual Allowance and Lifetime Allowances. However, whilst an adult can theoretically invest 100% of their earnings, a child's pension has a maximum annual contribution of £2,880 plus an additional 20% tax relief (up to £720).

It's also vital to remember that although a child can assume control of their pension at 18, unlike a Junior ISA, the funds in an SIPP cannot be accessed until they reach 55 (rising to 57 in 2028).

Children's pensions and inheritance tax

Contributions to a child's or grandchild's pension are often covered by one of the Inheritance Tax exemptions, meaning it could sit outside your estate for Inheritance Tax purposes. "This year, parents and grandparents are thinking more about what they are gifting, and the impact gifts can have on their family's future," says Rowan.

"A small amount put into a junior SIPP each month until the child turns 18 can really help them further down the line as they reach retirement."