Junior Pensions (SIPP) Tell me everything!

WayForward?

AnotherJoe wrote: »

But the same amount invested for education or a house would also make a massive difference and be more useful much quicker. And statistically its much more likely to be both used and needed.


Hence the thought that its best used when everything else is maxxed out.

Buying a house is a far greater commitment than paying into a pension. Can you explain the inheritance tax issues of a pension v gifting a house?
thanks

WayForward?

kidmugsy wrote: »

You'd rather have your LTA used up by contributions the had only a dismal 20% incentive rather than, say, salary sacrificed contributions that might be accompanied by an employer's contribution, two sets of NI savings, and 40% tax avoided? You must be mad.



You clearly don't grasp the meaning of "incentive".

There are a lot of "what if's" in your reasoning.

If you have covered off house and education where would you invest for your childs future to gain the best outcome in regards to inheritance tax, general tax, and assuming you don't want them to be able to spend the money in one go at 18 (Sometimes children do go off the rails and ignore parents advice)

Malthusian

WayForward? wrote: »

Buying a house is a far greater commitment than paying into a pension.

No it isn't. Ignoring tax relief you can put the same exact amount towards helping your child with house purchase than you were planning to put into a pension for them.

Can you explain the inheritance tax issues of a pension v gifting a house?

Essentially no difference. If you were planning to put money into your child's pension then you aren't planning to put more in than £2,880 a year of your own money. This means the gift is covered by your £3,000 annual gifting allowance either way.

The Inheritance Tax treatment is different regarding your child's estate but that's of little relevance at this point.

If you have covered off house and education where would you invest for your childs future to gain the best outcome in regards to inheritance tax, general tax, and assuming you don't want them to be able to spend the money in one go at 18 (Sometimes children do go off the rails and ignore parents advice)

Personally? My own name.

Out of those who ask about investing in a child's pension, less than 10% actually have a meaningful tax problem for holding funds in their own name, once you consider ISA allowances, dividend allowances, regular use of capital gains allowances, etc.

Malthusian

Dox wrote: »

But the same amount invested for education or a house would also make a massive difference and be more useful much quicker. And statistically its much more likely to be both used and needed.

I'm fascinated that there are stats on this - please could you give a link to where they are?

Google ONS mortality tables.

1 in 4 male newborns in the UK will not reach their State Pension Age and 1 in 13 will never be old enough to access their pensions.

By contrast less than 1 in 100 will die before the age of majority and less than 1 in 70 will die before the age of 30 when most people start thinking seriously about settling down and buying a house.

(True, many people who die before minimum pension access age will be able to access their pensions through serious illness rules. However this doesn't apply to those who get hit by a bus.)

cloud_dog

You only really have two options:

1. Retain 'access' money in your/OH names
2. Create a more formal 'Discretionary Trust'

If IHT is a consideration then perhaps more formal tax planning is required.

As an aside...We (myself/OH) use our unsheltered investment accounts for monies for a DD but for which we wish to retain control of. We are not there yet but I will manage any CGT considerations.

EDIT: I did consider starting a pension but, we are not flushed with cash so have decided on the above approach with the idea that at 18 we can have conversations around money (ISAs, LISA, pension).

jamesd

WayForward? wrote: »

Can you explain the inheritance tax issues of a pension v gifting a house?
thanks

Money in a pension is not part of your estate and inheritance is managed via an expression of wishes form, not your will. There is an important exception: if you opened that pension in the three years before death with new or transferred money it is subject to inheritance tax. It's when the pension account was opened, not when the money was put in.

The value of the house is covered by the usual seven year inheritance tax rule and is fully out of scope for inheritance tax after seven years.

jamesd

Tom99 wrote: »

Another possible option would be a SIPP in your name with your child as beneficiary, providing you have scope. That would be immediately outside your estate for IHT purposes and free from IHT if you die before age 75.

Close, but not quite right.

If the pension existed at least three years before death the money isn't subject to inheritance tax. If opened, including by transfer, within three years of death it is.

There isn't any inheritance tax change I'm aware of at 75. What does change at 75 is the income tax treatment of an inherited pension. Before 75 beneficiaries can take the money out tax free, for deaths from 75 on it's taxable income.

atush

As an aside...We (myself/OH) use our unsheltered investment accounts for monies for a DD but for which we wish to retain control of.

This is what we did.

AnotherJoe

cloud_dog wrote: »

As an aside...We (myself/OH) use our unsheltered investment accounts for monies for a DD but for which we wish to retain control of.

There's another reason to do this as well.

Lets say grand/son/daughter is born.
Great you think I'll start them a pension.

Then comes number 2. Then number 3 or 4 !

Can you actually afford to start pensions and make regular contributions for all these? How do you equalise them so that no 1 isnt much better off than no 3 or 4 because of the way the stock market went?

A bit like chaos theory, small differences in initial conditions could actually have big repercussions 50 years down the line. Plus no 1 may be in a position to benefit from pension in 60 years time, whereas no 3 really needed some extra tuition or whatever 40-50 years earlier, and number 4's a wastrel and frankly you dont want him to have any of your money but tough luck its irrevocably in his name and hes spending like billyo on drugs and gambling what he would have put into a pension but now doesn't need to. And number 2, unfortunately, didn't make it to a pension and never got the benefit of grandads money and lived in a manky house in a manky area because grandad had locked the money up for 60 years by which time it was too late.


So, I'm saving for granddaughter 1 in my own name. If and when 2 comes along, I'll double the contribution, but the money is now split nominally for both , they are equal, and I still have ability to divide unequally or indeed not give to one (or both) ata tiem of my choosing should circumstances deem that the best course of action at the time.

Malthusian

AnotherJoe wrote: »

So, I'm saving for granddaughter 1 in my own name. If and when 2 comes along, I'll double the contribution, but the money is now split nominally for both , they are equal, and I still have ability to divide unequally or indeed not give to one (or both) ata tiem of my choosing should circumstances deem that the best course of action at the time.

The problem with this approach from a fairness perspective (albeit there's no such thing as fairness) is that if you give GD1 half the combined pot when she turns 18 (or whenever you think she should have it), GD2 will get some of GD1's contributions and stockmarket growth.

Let's imagine that humans had a much shorter lifespan and that GD2 was born 2 years after GD1 and 2 years later GD1 reached the age of majority and you gave her half the pot. You'd've put in £400 for GD1 and £200 for GD2 but GD1 would only get £300. GD2 would in due course get the extra £100 that was originally intended for her sister.

Nothing changes if GD1 gets half the pot at 18 years instead of 4 except the fractions. If you invested £1,000 a year and growth was 2% over inflation, GD1 could expect £20k when the fund was divided in half on her 18th birthday and GD2 could expect £23k from the rest. If the funds were held separately then they would get £22k each.

GD2 also benefits more from stockmarket growth because part of GD1's half will have been invested for 16 years and part for 18, whereas part of GD2's half will have been invested for 18 years and part for 20.

Of course in reality the pot isn't going to grow at a steady rate, and the stockmarket might crash between the two 18th birthdays. But usually the stockmarket doesn't, and if it did you might delay passing on their money rather than cashing in at the bottom of the market.

Yes, you can divide unequally to try and even this up, but holding a separate pot for each grandchild saves you the bother of having to work out how to compensate for the fact that GD2 is getting a larger share simply because she was born later.