Building a nest egg for a child or grandchild could give your loved one a great start in life. Saving early increases the investment period and the size of potential contributions, taking maximum advantage of tax efficiencies and compound growth.
If your clients are looking to put money aside, they might be struggling to choose between a pension and an investment product. There are pros and cons to each and the right one for your clients depends largely on what they want the money to be used for, and when they want their child to have access to it.
By getting to know our clients – their financial circumstances and aspirations – we can help them choose the right product for their child. Here are two they might consider.
1. A Junior SIPP
What is a SIPP?
A self-invested personal pension (SIPP) can be opened for anyone under the age of 18.
Control of the pension passes to the child at 18, but as it is a pension, they won’t usually be able to access funds until they reach the minimum pension age – currently 55, but rising to 57 from 2028.
SIPPs offer more flexibility than a standard personal pension, but this often means higher charges too.
What are the benefits of a Junior SIPP?
Your clients can contribute up to £2,880 a year, with those contributions benefiting from government tax relief. An annual contribution could be topped up to £3,600.
Paying this maximum amount on behalf of a child, from their birth until they reach age 18, will make a huge difference to the size of their pension pot at retirement. Starting a pension at the age of 21, or later, when a child first enters full-time employment, would mean missing out on years of additional growth.
As well as tax relief top-ups, there are also Inheritance Tax (IHT) benefits to consider.
Your clients are already able to gift up to £3,000 a year using their IHT annual exemption. Gifts above this amount will become liable to IHT should your client die within seven years of making the gift. Making use of pension tax relief, however, means that a £2,880 contribution – well within the gifting limit – will be worth an extra £720 a year to their child’s pension pot.
Why might a pension not be the best option?
The most obvious drawback to a Junior SIPP is that the money your clients invest is tied up until their child or grandchild reaches the minimum retirement age. For a child born today, that will be at least age 57.
The money can’t be used to pay university fees or to help with the cost of getting onto the property ladder.
2. A Junior ISA (JISA)
What is a JISA?
A JISA is an individual savings account open to any UK resident under the age of 16. They can only be opened by a parent or guardian but, once set up, others can pay into it on the child’s behalf. This could be perfect if your clients are looking to contribute to their grandchild’s nest egg.
The current JISA subscription limit – the amount that can be contributed each year – is £9,000. There are two types of JISA:
A child can hold both types at the same time, but the £9,000 limit will be split between the two.
What are the benefits of a JISA?
JISAs are tax-efficient. There is no tax to pay on any interest earned in a Cash JISA and any profits accrued on a Stocks and Shares JISA are also tax-free.
Unlike a pension, an ISA can be accessed at any time (control over the investment passes to the child at age 18) which means funds could be used to help a client’s child through further education or onto the property ladder.
If a child chooses not to cash in their JISA at age 18 it will transfer to an adult ISA. The annual subscription limit for an ISA is £20,000, greatly increasing the amount the holder can save.
Why might a JISA not be the best choice?
Once a child reaches age 18, full control passes to them. If your clients want to save for a child or grandchild while retaining some say in how the funds are used, a JISA might not be the best option. A trust, for example, might offer more control.
Your clients will also need to be aware that the £9,000 subscription limit cannot be carried forward. If the full £9,000 is not used by tax year end the amount resets. Making full use of the limit, if it is affordable, maximises a JISA’s tax-efficiency.
Get in touch
There are many ways to put a nest egg in place for a child or grandchild. The right one for your client will depend on many factors, including when they want their loved one to be able to access the money, how much they intend to contribute, and how much control they want over how the money is used.
We can use our experience and expertise to help your clients make the best choice for them.
If you have clients who would benefit from financial help to provide for their loved ones, please get in touch. Email firstname.lastname@example.org or call 0116 240 7070.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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