More families are using children’s pensions to pass wealth to younger generations and avoid them having to pay inheritance tax, new figures have shown.
Pension contributions for under-18s rose to £79.6m in the year to 5 April 2023, up from £75.9m the previous year, according to the latest data from HMRC.
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“More obviously it’s a good way of jump starting your own child’s pension fund. People often start their pension too late in life meaning they miss out on a lot of compounding.”
What is a Junior Sipp?
Parents or a child’s legal guardian can set up a Junior self-invested personal pension (Sipp) for them as a tax-efficient way for under 18s to save.
Then any adult can contribute £2,880 annually to the child’s pension, which, once 20% tax relief is factored in, brings the total yearly contribution to £3,600. The Sipp reverts to the young person’s control when they turn 18.
If the full amount was contributed to a Junior Sipp from birth, the child could have well over £80,000 by the time they are age 18, according to calculations by Hargreaves Lansdown. Combined with saving into a Junior ISA could make the child a millionaire before they are 40.
Gifting money to their children by transferring it to their pension pot is popular because it allows the money to grow tax-free. Also, by putting the money into a pension that can’t be accessed until they are at least 57, the cash is less likely to be used for general spending.
Gifts to children and grandchildren, including into Junior Sipps, should be exempt from inheritance tax after seven years.
Inheriting pensions
Changes announced in the 2024 Budget mean pensions will no longer be exempt from inheritance tax from April 6 2027. Experts have said this may accelerate the trend of parents and grandparents taking money out of their own pension to transfer into their children’s pension.
“With inheritance tax on the rise, families are looking for ways to reduce their IHT bills. Parents and grandparents see contributing to children’s pensions as an effective way to reduce the size of their estate – whilst also ensuring their heirs don’t spend their inheritance too early,” said Tricker.
“With decades of tax-free growth, even modest contributions for children today can compound into meaningful savings by the time they reach retirement age,” he added.
If the whole £2,880 per year was contributed from birth, even if the young person didn’t make another contribution to the Sipp after the age of 18, they could have around £420,000 by the time they hit age 60, according to calculations by Hargreaves Lansdown.
“If they continued to contribute throughout their working life, then the sky’s the limit,” said Helen Morrissey, retirement specialist at Hargreaves Lansdown.
Given their peers won’t even start their retirement savings for another four years through auto-enrolment at age 22 this is a real boost.
Tricker said: “Pensions are one of the last legitimate tax shelters for family wealth. Used correctly, pensions are a powerful estate planning and intergenerational wealth transfer strategy.”
“Families increasingly realise that – if they have the means and don’t contribute to their children’s pensions – large sums of family wealth will end up in HMRC’s coffers.”
