Junior Pensions (SIPP) Tell me everything!

jamesd

WayForward? wrote: »

Hi I am considering a junior pension for our child. I am trying to research the best way to go about it and also the pros & cons.

It's a good idea in part because of the very long number of years of compounded growth that can be expected and because the money is safe from bankruptcy until it's accessible and similarly from benefit means tests. The FT opinion piece Help! My child’s pension has hit the Lifetime Allowance roadblock (search alternative) covers a range of other issues including the lifetime allowance.

While there is lifetime allowance charge potential and helping wth property buying can be helpful that buying is likely to be many years in the future when you're older, have a clearer long term picture of your own retirement needs and could use cash. A child ISA can be considered but the child gets partial control at 16 and total at 18. Still useful but not as secure for the dedicated purpose.

The pension money is outside your estate if you live for seven years after each payment or make the payments out of normal income. It is always outside the child's estate unless they happen to move it to another pension product in the three years before they die.

Pensions aren't solely a normal retirement thing, they can also protect against some other contingencies:

1. they can protect the individual, their children and spouse if they are diagnosed as having a life expectancy of no more than twelve months. Any part of the pot can be taken tax free by the individual, either to pay for treatment or make life easier. Assuming death before 75, 100% of what's left in the pot goes to beneficiaries as a beneficiary pension that they can withdraw money from tax free whenever they like, at any age, including even for a newborn child.

2. if they suffer from ill health sufficient to stop them from working, ill health pensions can be taken before age 55, individual pension provider rules differ. In effect, a form of permanent health insurance.

You'll also have provided for a good and if desired early retirement without providing so much immediately accessible money that they have no need to ever work, a significant concern for those parents towards the upper end of the wealth spectrum.

Because of the long timescale involved equities should dominate the investments and significant small cap exposure would be sensible as well. Something like 80% global equity tracker and 20% global small cap equity tracker could be fine. Perhaps add global emerging markets as well. There will be substantial down times, sometimes 50%, but the greater expected long term growth and no anticipated need for access makes that fine.

justme111

do 20% get added even though child does not pay any tax?

kidmugsy

Yes. 20% of the gross = 25% of the net.

justme111

tx. Usefulness of pension contributions can be very individual matter I think. If a couple with not much disposable income makes contribution for a child who is not likely to be earning much either so for him state pension might represent no drop in income it would be pretty much useless I think.
In another case imagine someone who started work after uni for whom parents contributed some minimal sums while he was young and he takes over once he starts working . In 10 years time when mortgage and children pressures kick in that person will be able to address those pressures without diverting significant resources to pension. When time comes that one is fed up with work and desperate to escape it one would know that years from the time when one can take pension are already taken care of one could concentrate on addressing the years before. Parents may be dead or not in a position to help then so what they done years ago will be valuable

kidmugsy

justme111 wrote: »

tx. Usefulness of pension contributions can be very individual matter I think.

Fair enough, but as one of the earlier posters pointed out the parents could well have spent that money in other ways to help their child through life. In other words, there's an opportunity cost with contributing to a pension.

When I was young I spent my accumulated boyhood earnings on a motorbike. It let me get to work for all the jobs I did in the university long vacations. So even money spent on personal transport at 19, 20, .... can make a huge improvement in life.

jamesd

justme111 wrote: »

If a couple with not much disposable income makes contribution for a child who is not likely to be earning much either so for him state pension might represent no drop in income it would be pretty much useless I think.

Think again. Every Pound put in delivers about a Pound a year of income from state pension age.

Invested at birth at 4.5% plus inflation the growth over 69 years to a presumed state pension age of 70 increases the value 20.9 times. Assuming 4% drawdown that's 0.83 times the gross put in as annual income for life. Since net is 80% of gross that's roughly a Pound of income in today's money for each net Pound put in.

Alternatively, with 8500 state pension, each 407 put in lets the child retire one year earlier on that same 8500 (caution, costs a little more for each extra year because of less compounding, the tenth year early would take 644 put in).

It's shockingly good value on the poorer side because of the big proportional increase in income

justme111

In the poorer side it would be of far higher value earlier in life I think. .Private tuition, help with deposit etc.
pensions are relevant to people who's disposable income is going to drop when retired , ie those who earn more than average. When talking about someone close to minimal wage they are not going to be worse off on SP than they were for the whole life while working. Although can be helpful in giving them an option to retire early..
Indeed there is an opportunity cost so I think contributions to pension for a cikd should not detract from anything else. Their beauty is that they can make a difference t retirement age even if they re so ridiculously low as to make no difference to anything else earlier. If a family pays £25 / month to s child's pension they are not going to notice it while for a child it will give abiut 5k incime in retirement and likely to leave capital untouched.

kidmugsy

Tell Grandma and Grandpa that the £3k per annum each can gift without Inheritance Tax worries fits nicely into a birthday present, a Xmas present and £2,880 into a pension.

Tom99

[FONT=Verdana, sans-serif]Another possible option would be a SIPP in your name with your child as beneficiary, providing you have scope.[/FONT]
[FONT=Verdana, sans-serif]That would be immediately outside your estate for IHT purposes and free from IHT if you die before age 75.[/FONT]
[FONT=Verdana, sans-serif]Since a child could not access a SIPP in their name, probably until age 60 or more, it is quite possible they will inherit your SIPP sooner.[/FONT]
[FONT=Verdana, sans-serif]Also if you change your mind and they need money for a house or whatever then providing you are over 55 at the time you could withdraw the money.[/FONT]

WayForward?

I'm just trying to cover all bases. ISA's are great and they are also being done, however I'd like to know that I have helped as best I can so I'm looking at all options. Is that OK?

Plus the child at 18 has full control of any funds in the junior ISA - I don't want to put everything in one basket especially when they can decide how everything is spent, we know how easily teenagers are persuaded by others and they may not make good financial decisions.