Junior SIPPs and savings options for children

Building up a nest egg for your children can help them get off on the right foot when they leave the family home.

Whether they want to start their own business, put it towards a deposit on a house, or use it to pay off steep university fees, that extra cash can help them begin their adult life without a mounting pile of debt.

You may think even further ahead and start squirreling away money they can withdraw as a pension later in life.

It’s never too early to build up financial security for your loved ones.

Children’s savings

There are a huge number of accounts available to help you save up for your children’s future, so here’s a rundown of what you need to know. If you’re still struggling to make a decision, you could always consult with a financial adviser who can find the right option for you.

How can parents help their children prepare for the future

Starting to save up while your child is young will enable you to take advantage of investment schemes and competitive interest rates to boost the amount of money in their pot.

It also can be a good idea to start teaching your child about money and how to use it responsibly from a young age, whether that’s by helping them save up their pocket money for something they really want or opening an account with a prepaid card. Getting them used to handling money confidently could help them avoid getting into debt later on in life.

Options

Explore these different options if you’re thinking of building up a sum of money for your child. Consider:

Junior SIPPs

A junior SIPP (Self Invested Personal Pension) is a pension that’s started for a child and the account is managed by a parent or legal guardian who will make investment decisions on their behalf until they have reached 18 years old.

It’s possible for the money to be withdrawn from the pension fund when the child reaches the age of 55, however, this threshold will likely increase in the future.

As it’s an extremely long investment plan, you may want to consider choosing a higher level of risk, because the money has a chance to recover if there are any downturns in the market, but it’s all about what you’re comfortable with.

How do they work?

The parent or guardian can deposit a maximum of £2,880 per tax year into the Junior SIPP and the government will add 20% tax relief up to £720, which would give you a total of £3,600 annually.

Once your child is 18 years old, they’ll be able to take over the account and it will convert into a regular SIPP.

As it’s usually a managed investment fund, it’s likely you’ll be required to pay a fee for services. This can include an annual management fee, as well as charges for certain types of trading. Read the terms and conditions carefully to get a full picture of what you’ll need to pay for a junior SIPP.

It’s possible to choose and manage the investments yourself through certain platforms, but this is very risky unless you have a strong knowledge of the stock market.

At the age of 55 (rising to 57 in 2028), your child can convert their pension into an income drawdown account. This enables them to take out a lump sum or have a regular income while the remainder of the money remains invested in the pension.

Savings accounts

As with standard savings accounts, there are a few options for children, including:

Regular savings accounts – These will typically offer a higher interest rate than other types of savings accounts, but you must deposit over a certain amount each month. If you want to withdraw money on behalf of your child before the fixed term has ended, you could be charged a fee.

Easy-access savings accounts – This is the most flexible of the savings accounts on offer, allowing you to deposit and withdraw money from your child’s account when you need to without being charged a fee. Interest rates are likely to be negligible though.

Fixed-rate bond savings account – This type of account is for those that want to lock away a lump sum for a set amount of time. By doing this, you’ll receive a competitive interest rate. There are fixed-rate bond savings accounts specifically designed for children, but you may find that some accounts are available to everyone, no matter their age.

Notice savings accounts – A notice savings account allows you to withdraw money, but you’ll need to let the account provider know when you wish to do this and there’ll be a minimum amount of notice you can give (usually between 30 and 90 days).

Junior cash ISAs

A junior cash ISA (Individual Savings Account) allows parents or guardians to deposit up to £9,000 per year without paying tax on the interest.

The child is then able to control the account from the age of 16 and can withdraw money at 18 years old, when it will become a standard cash ISA.

The current economic climate means you’re unlikely to see the money grow in a cash ISA as rising inflation rates will cancel out any interest accrued.

Provided you have opened the account with a regulated provider in the UK and it holds less than £85,000, the money held in a junior cash ISA is protected by the Financial Services Compensation Scheme (FSCS). This means that if the financial institution holding your junior cash ISA collapses, the money won’t be lost.

Junior stocks and shares ISA

Like a junior cash ISA, you can deposit up to £9,000 per year, but the money is invested in funds, investment trusts, shares, corporate bonds, or gilts. The money is exempt from income tax and capital gains tax.

You can open a junior stocks and shares ISA through a bank, building society, or investment platform. Most options will be fully managed, which means that all you need to do is choose a level of risk you’re comfortable with. There are accounts that enable you to pick your own portfolio, but unless you have a strong knowledge of investments, it’s a very risky option.

The longer you hold money in this type of account, the higher the chance of seeing better returns, but of course, there’s always a risk your money could decrease in a volatile market.

Make sure you’re fully aware of the fees you’ll be charged before choosing a junior stocks and shares ISA. This could include an upfront fee for opening the account, as well as ongoing management fees.

As with junior cash ISAs, the child can take over the account from the parent or guardian at the age of 16 and withdraw money when they’re 18 years old.

It’s worth noting you can split the annual £9,000 deposit allowance across a junior cash ISA and a junior stocks and shares ISA, but you can’t pay into more than one of each type of ISA per tax year.

Friendly society tax-exempt plan

This is a type of long-term investment savings plan set up with a friendly society, where you pay in a set amount each month for the duration of the term (usually 10-25 years) and once this has ended, your child will receive a tax-free cash sum. Your child must be at least 16 years old when the plan reaches maturity to receive the money.

A children’s tax-exempt plan can be opened by anyone on behalf of the child. However, if you’re not a legal guardian or parent, you’ll need their permission to set one up.

The money deposited into this type of plan will be invested into an actively managed fund, which means the amount received at the end of the term could be higher or lower than the overall amount you paid in.

It’s possible to have this type of account alongside a junior cash ISA or child trust fund and enjoy the tax-free benefits of both.

Child trust fund

The child trust fund scheme closed in 2011. It was available for children born between 1 September 2002 and 2 January 2011, but it’s still possible to pay into an existing child trust fund.

Child trust funds have been replaced with junior ISAs, so you can’t have both open at the same time. If you want to open a junior cash ISA, you must close the child trust fund first and transfer the money into the new account.

What to consider

Apart from opening a SIPP or savings account for your child, there are other ways to protect them financially. For instance:

Life insurance – Starting a family can be a trigger for taking out a life insurance policy for a lot of parents. If you die during the term of your policy, your loved ones will receive a payout. Getting your policy written in trust means that the life insurance lump sum won’t be considered part of your estate and therefore won’t be subject to inheritance tax.

Death in service cover – Your employer may offer this as a company benefit. It provides a lump sum to your family if you die while you’re on the payroll (you don’t need to be at work when it happens). This is usually a multiple of your annual salary.

Family income benefit – This is a type of life insurance, where your family will receive a fixed monthly income for a set period. You choose the monthly amount and the term. It’s worth noting that if you die during the policy term, your family will only receive the monthly income until the policy end date.

Income protection insurance – You’ll receive a monthly income if you’re unable to work due to illness or injury. There are short-term and long-term options available, and you can usually cover up to 70% of your income.

Alternatives

If none of the above are the right option for you and your child, you could think about:

Current account

If your child is aged between 11-17, it’s possible for them to open a current account (although children under 16 will need help from a parent/guardian).

Usually, you’ll be able to start one with as little as £1 and it could even have a competitive interest rate.

A current account can help teach your children how to manage their money effectively using internet banking or an app and most enable parents to implement a daily withdrawal limit.

Prepaid debit cards

Certain prepaid debit cards are available to children aged from just six years old. They can be used to teach budgeting, and some enable parents to receive alerts on what their child is spending. Watch out for monthly fees from providers like GoHenry and Osper.

Premium bonds

This is essentially a savings account you can deposit a minimum of £25 in to and save up to a maximum of £50,000. Your child won’t earn any interest, but each bond (one bond = £1) has a unique number which is entered into a prize draw each month. If one of their bonds is chosen, they win a cash prize which could be up to £1 million.