Number of children with a pension surges as wealthy parents seek to cut inheritance tax bills
The number of children with a pension has surged over the past year as wealthy parents gift them money to trim their inheritance tax (IHT) bill, fresh figures reveal.
Investment platform Hargreaves Lansdown revealed a 158 per cent rise in the number of Junior Self Invested Personal Pensions opened in the first month of the new tax year, compared with the same period a year before.
The surge in popularity comes as families desperately try to gift away funds to avoid punitive inheritance tax on their financial legacies.
Chancellor Rachel Reeves is soon set to widen the inheritance tax net to include unspent pension pots – so parents are working quickly to gift surplus money away now.
Junior Sipps are tax-efficient retirement accounts that can be opened by a parent or legal guardian for a child under 18.
Parents or grandparents can contribute as much as £2,880 in total every tax year, which is then boosted by 20 per cent in basic tax relief by the Government. This brings the total to £3,600.
Investing for the future: The number of parents paying in the maximum £2,880 into a Junior Sipp has climbed by 17% in a year
The family maintains control of the account until the child turns 18. They can choose their own investments within the pension, or opt for a ready-made plan.
Under Reeves’ rules, unused defined contribution pension pots, which are currently exempt from death duties, are set to be dragged into the tax net from next April.
> Read more: How to pick the best Sipp for your pension investments
The move that has upended some retirees’ financial plans.
Helen Morrissey, head of retirement analysis at Hargreaves, says: ‘Some families may be trying to get ahead with planning before next year.
‘This could be a key factor behind the surge in openings over the last year as people make the most of gifting allowances to boost their loved one’s financial resilience while reducing the value of their own estate for inheritance tax.’
And with spiralling fears of further restrictions on IHT gifting allowances, families are making the most of the current rules.
Once it’s outside of their pension or savings accounts, no inheritance tax will be due on the money if the parent or grandparent survives for seven years after making the gift.
Plus, everyone gets a £3,000 annual gift allowance, which means that if the parent has made no other gifts that tax year, they can use this for the contribution.
Could your child be a pension millionaire?
Setting up a pension for a child requires extremely long-term thinking.
But the decision to lock away funds could build a £1million pension pot for their children to enjoy in retirement, as the pot will potentially benefit from decades of compound returns on the investments.
Having the money in a pension could also potentially stop them squandering their funds.
While funds in Junior Isas can be accessed at age 18, the money saved in a Junior Sipp will be inaccessible by the child until they reach 57.
If you paid the maximum amount into a Junior Sipp every year from a child’s birth to age 18, they would have a retirement pot of around £100,000 as they enter adult life.
It means that even if they made no other contributions throughout their working life, your child would very likely become a pension millionaire by age 65 as the value of their investments hopefully grew over time.
This assumes that investments grow at a rate of 5 per cent, which is a conservative estimate for pension growth.
If the funds were to grow at a quicker pace the child would have an even larger pot at age 65.
The number of parents maxing out Junior Sipps has climbed by 17 per cent in the last year – and 47 per cent in the last five – as they hunt for more tax efficient ways to funnel their cash.
Morrissey adds: ‘While tucking money away in a Junior Sipp won’t help your loved one buy their first home, those early contributions can take the heavy lifting out of their retirement planning and leave them with more flexibility as to how they manage their money in the here and now.
‘Knowing their Sipp is working hard for their retirement means they may be able to allocate more of their money to other priorities such as saving for a first car or home.’
Most bought shares inside a Junior Sipp at the platform include a drove of blue-chip companies such as Legal & General Group, insurer Aviva and house builders Persimmon.
For funds, popular options include Fidelity index World, Vanguard FTSE Global All Cap Index and Artemis Global Income, Hargreaves says.
