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Parents and grandparents are increasingly stashing money into pension schemes for their children – and tax experts say avoiding death duties is a key reason why.
New figures from the tax man, obtained via a Freedom of Information request, showed the number of pension schemes for under-18s that received money rose by 52pc between the 2018-19 tax year and 2020-21.
The total value of contributions to junior self-invested personal pensions, or Sipps, rose by 56pc, from £43m to £67m, between 2017 and 2021, according to HM Revenue & Customs, which could only provide data on “relief at source” schemes, not “net pay” arrangements.
Junior Sipps will almost always grow more quickly than junior Isas thanks to tax relief. Even non-earners, like children, get 20pc tax relief – meaning a £2,880 annual contribution gets topped up by an extra £720.
However, unlike a junior Isa, which can be accessed from 18, you have to wait until 55 to withdraw money from a junior Sipp.
A family contributing £240 a month into a pension from their child’s birth would result in a pension pot of over £100,000 by the time they turn 18, according to calculations by Lubbock Fine Wealth Management.
Assuming no more money was added, but that the pot grew by 5pc a year after fees, a further 40 years of compounding interest would result in a pot of £700,000 by the age of 58.
Görkem Gökyiğit, a financial planner at Lubbock Fine, said more parents and grandparents were turning to junior pensions to avoid “getting dragged into the inheritance tax net”.
He added: “There is an increased requirement for additional methods to pass on wealth in the most tax-efficient manner. Doing it through a pension is a very sensible way of achieving that goal.”
Junior pensions remain little used – and contributions are capped at £3,600 a year (including tax relief). HMRC data shows just 38,000 people made individual contributions in 2020-21.
Junior Sipps must be set up by a child’s parent or legal guardian, however it is typically grandparents who contribute to the pot afterwards, according to wealth management firm Quilter.
Jon Greer, of the firm, said: “From a grandparent’s view, they want future generations to perhaps have an easier ride – and that they’re looked after.
“A lot of grandparents are worried about handing money to younger generations and what they’ll do with it – and whether they’ll blow it. Maybe their child will be grateful but maybe they will have more pressing needs in the immediate future.”
Unspent pensions pass down the generations free of inheritance tax. Instead they are taxed at the marginal income tax rate of the recipient which could mean it is withdrawn entirely tax free.
Currently, if the pension holder dies before the age of 75 no tax of any kind is due – although the Government is consulting on partially closing this loophole.