Tax efficient ways to invest for your children.
One of the many questions we are asked regularly is how investments can be made for children. The reality is there are multiple options ranging from as simple as opening a bank account in their name to setting up complex trusts with age and spending restrictions.
Here we will focus on two of the simplest and most tax-efficient ways to invest for your children: Junior ISAs and Junior SIPPs.
What are Junior ISAs and Junior SIPPs and how do they work?
Junior ISAs
Designed to fund future life events, Junior ISAs are a tax-efficient way to invest over the medium to long term for your children.
In the 2021/22 tax year, the savings limit for Junior ISAs is £9,000.
A parent or legal guardian manages the Junior ISA account, and makes any investment decisions (if relevant). The child can take control of the account when they’re 16 but cannot withdraw the money until they turn 18.
Like standard ISAs, the money can be accessed at any time. Any income or capital taken from the ISA is tax-free as the money paid into it has already been taxed.
You cannot have a Junior ISA as well as a Child Trust Fund. If you want to open a Junior ISA ask the provider to transfer the trust fund into it.
There are 2 types of Junior ISA:
A cash Junior ISA, usually available from your bank or building society. You will not pay tax on interest on the cash you save.
A stocks and shares Junior ISA, sometimes available from your bank or can be accessed through an investment platform or provider. The cash is invested and you will not pay tax on any capital growth or dividends you receive.
Your child can have one or both types of Junior ISA, but only one of each type per child.
Junior SIPPs (Self-Invested Personal Pension)
Designed to fund their retirement, Junior SIPPs are a tax-efficient way to invest over the long term for your children.
In the 2021/22 tax year, the savings limit for Junior SIPPs is £3,600 gross.
A parent or legal guardian manages the Junior SIPP account, and makes any investment decisions, until the child turns 18.
Like most pensions, the money in a SIPP cannot be accessed until age 55 (rising to 57 in 2028). Typically, 25% of the SIPP can be taken as a tax-free lump sum. Any income is assessed for income tax as the money paid into it has benefited from tax relief and tax-free growth.
Money paid into SIPPs is invested and you will not pay tax on any capital growth.
What are the benefits of a Junior ISA?
Any parent or legal guardian can start a Junior ISA for their child, and even family and friends can add money as well.
When your child turns 18 they will get access to the money - it could give them a helping hand with buying a car, university fees, their first home or a future nest egg.
What are the benefits of a Junior SIPP?
Like all pensions Junior SIPPs have the benefit of attracting 20% tax relief on the money paid into them – for every £80 paid in, an additional £20 is added in tax relief. For example, if you want to maximise the full contribution of £3,600 this tax year for a child, you will pay in £2,880 and £720 will be paid in by HMRC in the form of tax relief. The tax relief is claimed automatically by the bank or provider and is the same amount whether you yourself are a non-taxpayer, basic rate, higher rate or additional rate taxpayer.
Paying into a Junior SIPP will give your child a great head-start on their retirement savings. It’s never too early to get started. You can read all about how much you need in your pension pots to retire on another one of our blogs.
Gifts to a child’s pension are often covered by one of the inheritance tax (IHT) exemptions and so could fall outside your estate for IHT purposes. You can read more about IHT on our dedicated IHT webpage.
What are the risks?
Whether in a Junior ISA (stocks and shares) or Junior SIPP your money is invested. This means it is subject to investment risk which means the value of the money paid in can go down as well as up in value and there is no guarantee your child will get back more than you paid in for them.
Additionally, one of the greatest benefits of these types of investments is their tax efficiency. Tax rules can change which may reduce the benefits in future, and how beneficial the tax rules are depends on the individual circumstances of the parents/guardians and the child it has been set up for.
Each Junior ISA and Junior SIPP will come with its own investment options and charges. It can sometimes be a challenge to figure out what represents good value for money and what the right choice is for you and your children. We recommend seeking advice from independent financial advisers like ourselves, as our independence means we can examine the whole market to see what the best options are for you without any bias towards any bank, provider or investment manager.
How we can help
If you would like help figuring out the best way to start investing for your child’s future, or if you’ve already started and want advice on where to go next, get in touch for a free initial chat with one of our Chartered Financial Planners.
Please note this article offers information about financial planning and should not be taken as personal advice. The value of pensions and investments can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.