‘My young sons will soon have bigger pensions than me’

‘Even though they are so little, it’s nice to know you are helping them in this way for the future’

If all goes to plan, Isaac Wallington will have a pension worth more than £20,000 before he even turns 18.

Isaac, three, and his older brother Eddie, six, have had junior self- invested personal pensions ( Sipp) for just over a year. Their mother, Danielle, 37, from St Albans, pays £ 75 a month into each to provide them with a nest egg to rely on later in life.

“It’s something that’s come from my dad,” says Wallington. “I’ve always had it in my head how important a pension is and the earlier you start, the better.”

Junior personal pensions are similar to their adult counterparts. You can opt for a personal junior pension, which are typically ready-made portfolios, or a junior Sipp, where you can pick your own stocks and funds.

Crucially, the Government adds tax relief, too, meaning the £2,880 maximum becomes a £3,600 contribution. Usually, the money is locked away until the minimum pension age — 55 at the moment, but increasing to 57 in 2028.

Thanks to the 20pc tax relief, Wallington’s £75-a-month contribution is effectively worth £88.80. If Isaac’s pot manages 4pc investment growth a year, it will be worth nearly £22,000 by the time he is an adult. As Eddie was older when his pension was opened, at the age of five, he will have about £18,000 when he turns 18.

“Even though they are so little, it’s nice to know you are helping them in this way for the future,” Wallington says. “They’ve built up hundreds of pounds already.”

Wallington, who runs an app for women who work from home called Wrkhere, is far from alone in choosing a junior pension as the route of choice for her children’s savings. The investment platform Fidelity said that the number of junior Sipp customers doubled from 2021 to last year, and has more than tripled over the past two years.

Hargreaves Lansdown, the stockbroker, now has 13,500 junior Sipps worth an average of £11,300, having seen double digit growth in the number of junior Sipps over the past five years. So, should you join the trend and open a junior pension? Here’s what you need to know.

THE PROS

The main advantage of saving into a junior pension for your child is the length of time that this money will be invested, giving it decades to benefit from compound interest.

If you saved £2,880 (the maximum) a year into a child’s pension until they were 18, it would be worth nearly £ 97,000 by the time they were 18, assuming 4pc investment growth each year. Even if you stopped paying into their pension once they turned 18, the pot would grow to nearly £460,000 by the time they hit age 57. “Due to compound interest, even small contributions can make a huge difference,” says Emma-Lou Montgomery from Fidelity.

As a tax-efficient wrapper, all growth within the pension is free from capital gains tax and any dividends are free from income tax.

A junior Sipp could also be an effective inheritance tax ( IHT) shelter. Putting money into a child or grandchild’s pension moves the money outside of your estate — providing you live for another seven years. Pensions are normally separate from your estate, too, so it won’t impact any future IHT liability for your child or grandchild.

THE CONS

The length of time associated with a junior Sipp has its drawbacks, too. As your child normally cannot access the money until their fifties, it may feel frustrating if their savings are locked away as they scramble for a house deposit or want to start a business.

“There are a number of big life hurdles they are likely to need your help with before their retirement needs, like studying, getting married or buying a house,” says Becky O’Connor from PensionBee, a pension provider.

There are also more tax efficient ways to save. With a junior Sipp, the tax relief is based on the child’s tax bracket so – as children are unlikely to be taxpayers or pay basic rate – they only receive basicrate tax relief. If you are a higher or toprate taxpayer, you would benefit from 40 or 45pc tax relief if you put the money into your own pension instead.

Or, as Scott Gallacher, from the financial advice firm Rowley Turton suggests, you could save into a separate pot for your child while they are still young, and then when they are older, and more likely to be a higher- or even top-rate taxpayer, they could use those savings to pay into their pension and receive generous tax relief.

THE ALTERNATIVES

If a junior Sipp isn’t for you, there are plenty of other ways you can build a nest egg for your child or grandchild.

A simple cash savings account can be a great starting point: there is less risk as the money is not invested in the stock market, the interest rates tend to be higher than their adult counterparts and usually the money is protected by the Financial Services Compensation Scheme’s £ 85,000 limit if the bank were to go bust. The top rate comes from Halifax, according to the website Savings Champion, at 5.5pc.

You could also opt for the most popular savings product in the UK, NS&I’s Premium Bonds. This is more like a lottery – each month, prizes ranging from £25 to £1m are paid out. You can hold up to £50,000 worth of bonds.

And if you’re keen to invest for your child or grandchild, but do not want to lock the cash away for decades, you can use a junior Isa. You can pay in up to £9,000 a year, all growth is tax-free and the money becomes available when they are 18.

Danielle Wallington is paying into a junior pension for both of her sons