Junior SIPP?

Kenhere

Can the parent only administer and pay into a juniot sippd until the child is 18 when it converts to an adult sipp? After 18 do all payments into the sipp have to come from a bank account in the childs name, or can the parent continue to pay into the sipp and administer the account?

xylophone

https://www.hl.co.uk/pensions/junior-sipp/what-is-a-junior-sipp

A Junior SIPP is the same as a regular SIPP – the difference is that a parent or legal guardian manages the account, and makes any investment decisions, until the child turns 18.

dunstonh

Can the parent only administer and pay into a juniot sippd until the child is 18 when it converts to an adult sipp?

Junior SIPP is not a product type. It is a marketing name issued by a provider. It could be called Chocolate SIPP if they thought they would sell more. So, in that respect, normal pension rules apply and age has no influence.

Third party payments are allowed on pensions subject to anti-money-laundering checks.

Kenhere

Thank you dunstonh

"Third party payments are allowed on pensions subject to anti-money-laundering checks."

So a parent can continue to make contributions.

After the child is age 18 are there any limits on how much the parent can pay into the child's SIPP? Does it matter if the parent has no employment income? Will the child's SIPP get any tax credit added to the contribution?

Dox

Kenhere wrote: »

After the child is age 18 are there any limits on how much the parent can pay into the child's SIPP? Does it matter if the parent has no employment income? Will the child's SIPP get any tax credit added to the contribution?

The child (whatever age they might be) has the same SIPP limits as an adult. Those limits are based on the child's earnings, if any. In the absence of any earned income, contributions to a SIPP are limited to £2880 gross + tax reclaimed on their behalf and added to the SIPP (even if a non-taxpayer aged 18 months!) = £3,600.

dunstonh

So a parent can continue to make contributions.

Yes. As could grandparent, aunts and uncles.

After the child is age 18 are there any limits on how much the parent can pay into the child's SIPP?

Remember what I said about age. There is no such thing as a child SIPP. Everybody from the day they are born up to age 75 can contribute to a pension under exactly the same rules.

The annual allowance rules for the individual, whether they are adult or a child, are the same. A child is likely to be a non-earner. So, the annual allowance is likely to be £3600. if they get a job at 18 and earn £15,000 a year then they can pay £15,000 a year into the pension. Whether the money comes via parent, grandparent etc does not matter.

Will the child's SIPP get any tax credit added to the contribution?

Its not a credit. It is a relief. That may seem like terminology but everybody gets based rate relief at source on individual contributions. Whether they are non-rate taxpayer, basic rate or higher rate. Age does not matter.

Kenhere

Thank you.

On the basis that the investment is not to be withdrawn and is for pension planning, is there any reason to open and make contributions into a LISA instead of a SIPP?

The LISA is accessible and can be diverted to property or can be withdrawn for other reasons. The SIPP appears better for locking the money away for the long term purpose. Both get 20% tax relief, and limit for annual contributions is £400 more for the LISA £4,000 v £3,600.

But are there any other considerations? Putting aside future legislation which cannot be known, as things are now could the childs future earnings affect the benefit of having accummulated savings in one or the other?

bowlhead99

Kenhere wrote: »

On the basis that the investment is not to be withdrawn and is for pension planning, is there any reason to open and make contributions into a LISA instead of a SIPP?

A child cannot have a LISA, but assuming you are talking about once they are old enough...

The LISA is accessible and can be diverted to property or can be withdrawn for other reasons. The SIPP appears better for locking the money away for the long term purpose. Both get 20% tax relief, and limit for annual contributions is £400 more for the LISA £4,000 v £3,600.

The LISA has more than £400 a year extra capacity because the £4000 is the cash contribution limit meaning there will be £5000 in the account after the 25% bonus is applied, while the pension's £3600 is gross after applying basic rate tax relief to a £2880 cash contribution. So it is £5000 gross of bonus vs £3600 gross of tax relief.

The person will not be able to get the LISA until they are adult and it may not be long after they are adult that they start to earn more than £3600 a year, and so the 'more money can be put into LISA than pension per year' will not apply for a particularly large proportion of the person's working life.

But are there any other considerations?

Money that the child has accumulated in their inaccessible pension controlled by a SIPP trustee is not going to be considered 'theirs' if they need means-tested benefits or if they are being chased by creditors for debts. It is outside their estate for inheritance tax purposes if they die and someone will inherit it from them. Whereas if they have money in their own name in a cash or investment LISA it is 'theirs' for all those purposes. So pension is good from that perspective if the money definitely won't need to be touched until pension age, but clearly it is useful to have access (albeit with penalty) to the money for whatever reasons life throws at you.

Putting aside future legislation which cannot be known, as things are now could the childs future earnings affect the benefit of having accummulated savings in one or the other?

Obviously getting the 20% tax relief if you are not even a tax payer at age 18-21 because you are still in full time education is positive. But if you are a tax payer in your early 20s then most of the relief on a small SIPP contribution is really just deferring tax rather than relieving tax because you are likely to be paying tax when you draw it out in retirement. So at that stage of your life using a LISA product which definitely gives a 25% bonus which is not taxable further down the line, is useful.

If the person's future earnings are high, they will be able to get high rate tax relief on pension contributions they make. If they have put money into a LISA product it will be quite useful to be able to take it out of that product (albeit with a small penalty) and put it into a pension getting high rate relief (currently 40%+). Whereas if they already have it untouchably in a pension having only received 20% tax relief on it, they may regret not having the option to do that.

If the person's future earnings are really high, they may end up with so much pension and investment income in retirement that they are paying high rate tax in retirement. Most are not so fortunate. However, if the person found themselves in that situation it would then have been counterproductive to contribute to a pension getting only 20% tax relief as a youngster early in your career and then pay 40% tax (after a small tax free lump sum) on the proceeds in retirement - it has actually cost money rather than made money and would have been better to use the LISA which gave an untaxable bonus.

For the higher income people in the last examples, a pension rather than LISA contribution at a young age seems relatively less valuable, however people with higher incomes and assets are the sort of people who could more likely get the benefit of having the pension money be outside their estate when they die, for their own inheritance tax planning purposes - to get the money into the hands of their beneficiaries without suffering 40% IHT.

If the person is not even 18 yet it might be a bit early to assume exactly how much money they will earn over their life. 'A bit of both' would not hurt, though even disregarding the chance to buy property with the LISA I would personally lean towards LISA because there is typically time to fund pensions later (and get higher rate relief when doing so, if you qualify for that) while LISA has a capped annual limit and is more 'use it or lose it'.

Kenhere

bowlhead99

A brilliant point by point analysis of the pros and cons. This really helps making the choice. Very many thanks!

Keep_pedalling

Unless you are making provision for more immediate needs such as Uni, and getting a first home then thinking about a SIPP should not be a priority.

Kenhere

bowlhead99 wrote: »

A child cannot have a LISA, but assuming you are talking about once they are old enough...

The LISA has more than £400 a year extra capacity because the £4000 is the cash contribution limit meaning there will be £5000 in the account after the 25% bonus is applied, while the pension's £3600 is gross after applying basic rate tax relief to a £2880 cash contribution. So it is £5000 gross of bonus vs £3600 gross of tax relief.

The person will not be able to get the LISA until they are adult and it may not be long after they are adult that they start to earn more than £3600 a year, and so the 'more money can be put into LISA than pension per year' will not apply for a particularly large proportion of the person's working life.

Money that the child has accumulated in their inaccessible pension controlled by a SIPP trustee is not going to be considered 'theirs' if they need means-tested benefits or if they are being chased by creditors for debts. It is outside their estate for inheritance tax purposes if they die and someone will inherit it from them. Whereas if they have money in their own name in a cash or investment LISA it is 'theirs' for all those purposes. So pension is good from that perspective if the money definitely won't need to be touched until pension age, but clearly it is useful to have access (albeit with penalty) to the money for whatever reasons life throws at you.



Obviously getting the 20% tax relief if you are not even a tax payer at age 18-21 because you are still in full time education is positive. But if you are a tax payer in your early 20s then most of the relief on a small SIPP contribution is really just deferring tax rather than relieving tax because you are likely to be paying tax when you draw it out in retirement. So at that stage of your life using a LISA product which definitely gives a 25% bonus which is not taxable further down the line, is useful.

If the person's future earnings are high, they will be able to get high rate tax relief on pension contributions they make. If they have put money into a LISA product it will be quite useful to be able to take it out of that product (albeit with a small penalty) and put it into a pension getting high rate relief (currently 40%+). Whereas if they already have it untouchably in a pension having only received 20% tax relief on it, they may regret not having the option to do that.

If the person's future earnings are really high, they may end up with so much pension and investment income in retirement that they are paying high rate tax in retirement. Most are not so fortunate. However, if the person found themselves in that situation it would then have been counterproductive to contribute to a pension getting only 20% tax relief as a youngster early in your career and then pay 40% tax (after a small tax free lump sum) on the proceeds in retirement - it has actually cost money rather than made money and would have been better to use the LISA which gave an untaxable bonus.

For the higher income people in the last examples, a pension rather than LISA contribution at a young age seems relatively less valuable, however people with higher incomes and assets are the sort of people who could more likely get the benefit of having the pension money be outside their estate when they die, for their own inheritance tax planning purposes - to get the money into the hands of their beneficiaries without suffering 40% IHT.

If the person is not even 18 yet it might be a bit early to assume exactly how much money they will earn over their life. 'A bit of both' would not hurt, though even disregarding the chance to buy property with the LISA I would personally lean towards LISA because there is typically time to fund pensions later (and get higher rate relief when doing so, if you qualify for that) while LISA has a capped annual limit and is more 'use it or lose it'.

"Obviously getting the 20% tax relief if you are not even a tax payer at age 18-21 because you are still in full time education is positive."

20% tax relief so this refers to SIPP not LISA? Is there something significant about the age 18 - 21 about paying into a SIPP or limits, or special rules for being in (or not being in) higher education?