Junior ISA & Junior Sipp

funnymonkey

Good afternoon.
I'm after a little advice please.
I've put some money into my child's Sipp and ISA (both stocks) as I don't want them to blow it all when they're 18 but I feel reluctant to add any more into a taxable sipp when I can put it in a tax free wrapper for them.
I was just wondering if there's an alternative to this quandary?
Thank you

eskbanker

What do you mean by 'taxable SIPP'?

funnymonkey

Pensions are taxable as classed as earned income

eskbanker

But that taxation (on 75% of the withdrawals from a pension pot) is more than offset by the 20% relief on the way in, so pensions are generally regarded as tax-efficient vehicles.

webnibbler

eskbanker said:

But that taxation (on 75% of the withdrawals from a pension pot) is more than offset by the 20% relief on the way in, so pensions are generally regarded as tax-efficient vehicles.

Also for a child that tax when drawing down on the SIPP is not for a very long time yet. Lots and lots of time for compounding to make those initial subscriptions very worth while.

I have a Junior SIPP for my 7yro daughter which will simply be left to compound for years to come with a 100% equity tracker. Trick will be getting her to remember she has it.

funnymonkey

Thank you for all your replies.
I still think I'm missing something....hoping you can prove me wrong!! I'm not getting my head around it!!
Let's say for example I invest £1000 into a junior sipp then the government add their portion. Then I invest in the next Facebook or Amazon (dream on!! Lol)
In years to come my child draws on the fund and has to pay tax on 75% of that fund.
Now wouldn't it be better to invest in a ISA and although there's 20% less in there my child would be able to draw 100% tax free?
The main benefit of a junior pension over an ISA is that they can't access the pension until they're 55 so money locked away for later years.
That's how I'm understanding it.

eskbanker

funnymonkey said:

Thank you for all your replies.
I still think I'm missing something....hoping you can prove me wrong!! I'm not getting my head around it!!
Let's say for example I invest £1000 into a junior sipp then the government add their portion. Then I invest in the next Facebook or Amazon (dream on!! Lol)
In years to come my child draws on the fund and has to pay tax on 75% of that fund.
Now wouldn't it be better to invest in a ISA and although there's 20% less in there my child would be able to draw 100% tax free??
That's how I'm understanding it.

Let's assume (ambitious!) investment growth of 300% (ignoring fees) between starting and accessing the money in 40+ years time, no substantive changes to pension and taxation regimes over that time (somewhat unlikely but nothing better to go on), and that the child will be a basic rate taxpayer in retirement.

In the SIPP, the £1,000 would be grossed up to £1,250 and would turn into £5,000 during the term.  25% of that would be available tax-free, and the residual £3,750 would then be taxed at 20%, so the net accessible amount would be £1,250 plus 80% of £3,750, so £4,250.

In the ISA, the £1,000 would simply turn into £4,000.

There are obviously differences in accessibility - as you observe, the child can access ISA money at 18 but can't currently access pension money until 55, which will increase by the time they get there....

funnymonkey

Thank you for your excellent reply eskbanker.
I understand now but, there's always s but.
Let's assume the return is far greater than 300% as if invested in stocks wisely that could be achieved within a few years as global economy recovers from this horrible virus
Let's say 2000% plus dividend payments over 40+ years.
Then I believe with that kind of growth you would wish to avoid 75% taxation.
I know I'm stretching the boundaries of reality there with that % increase but if I'm right the as the growth numbers increase then being in an ISA tax free would be the way to go???

eskbanker

funnymonkey said:

Thank you for your excellent reply eskbanker.
I understand now but, there's always s but.
Let's assume the return is far greater than 300% as if invested in stocks wisely that could be achieved within a few years as global economy recovers from this horrible virus
Let's say 2000% plus dividend payments over 40+ years.
Then I believe with that kind of growth you would wish to avoid 75% taxation.
I know I'm stretching the boundaries of reality there with that % increase but if I'm right the as the growth numbers increase then being in an ISA tax free would be the way to go???

No, if SIPP is compared to S&S ISA on the above basis, and they're invested in the same thing (with dividends reinvested if applicable), then whatever the investment growth percentage is, the net result is that the SIPP comes out ahead by exactly 6.25% every time.  For example, 2000% growth would turn £1K into £21K in an ISA but in a SIPP it would be £26,250 gross and £22,312.50 net after 75% of that was taxed at 20%.

There is a caveat that the higher the initial sum(s) and/or the higher the investment growth, then there's more chance that some or even all of the SIPP drawdowns could eventually become taxable at 40% rather than 20% when combined with state and workplace pension income to take the recipient into the higher rate tax band, but that's going to be hard to predict at this range!

funnymonkey

Thank you so much for your explanation.
Fully understand now....much appreciated