Junior pensions explained: why starting early pays off
One of the best gifts you can give a child (or grandchild) is a good start in life. Yet what about their “later life”? One day, your loved one will hopefully enjoy a long, comfortable retirement.
By setting up a pension for a child, you can ease the pressure from their own savings when they start their careers. This could mean they enjoy more disposable income and less financial stress as they progress through key life milestones – e.g. getting married and starting a family.
With this vision in mind, our Grantham financial planners offer some insights into how parents and grandparents can open and manage a pension for a child.
An overview of child pensions
Only a parent or legal guardian can set up a pension for a child, who must be aged under 18. These are called Junior Pensions.
The market for these pensions is relatively small since only a small number of people consider them. However, this is not to say they are not valuable.
Whilst your gift of a Junior Pension may not be appreciated by your child for decades, it can be one of the most powerful and altruistic financial gifts you can make.
The power of a Junior Pension is partly found in the timeframes involved. Over six decades, for instance, compound interest and tax relief can work together to produce a sizeable pot without requiring huge contributions.
When combined with the child’s own pension contributions (e.g. to workplace schemes over their career), your contributions could take enormous pressure away to save for their retirement.
Who should open a Junior Pension?
Not everyone is in the financial position to think this far ahead for their child. Understandably, more immediate goals and concerns often take precedence (e.g. saving towards university).
However, you do not necessarily need to fill up your own pension and Isa allowances before turning to your child’s possible retirement needs. Even small contributions to a Junior Pension could add up to a considerable sum for your child to use later.
In 2024-25, UK pension funds cannot be accessed until an individual turns 55 (unless there is an exceptional case, such as a terminal illness). By 2028, this Normal Minimum Pension Age will rise to 57. This helps ensure the funds you contribute are used for their intended purpose.
A Junior Pension can receive up to £3,600 in contributions per year – e.g. from parents and/or grandparents. This includes the basic rate tax relief, which means that up to £2,880 net can be contributed each tax year.
Be mindful of this if you are a higher or additional rate taxpayer! You cannot claim an extra 20/25% relief via a tax return for a Junior Pension.
Junior Pensions in the UK overwhelmingly take the form of “SIPPs” (self-invested personal pensions). These are similar to adult SIPPs, offering a high degree of investment choices and flexibility – e.g. potentially thousands of funds and dozens of markets.
You must also be a UK resident to open a SIPP or work overseas with UK earnings. Please take note if you are currently living abroad or intend to in the future.
Invitation
Junior Pensions can be a powerful way to give a financial “leg up” to a loved one aged under 18. However, they are not the only option.
Junior Cash ISAs and Junior Stocks & Shares ISAs can be great tools for leaving a legacy to a child. In 2024-25, a child can receive up to £9,000 per year into their Junior ISA. These funds can then be accessed once the child turns 18 (rather than 57).
Premium Bonds, general savings accounts and other tools can also have their place within an inter-generational financial plan. Seek professional advice to get the full information you need and to build a bespoke strategy which accounts for your goals and the needs of the child.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
