As we grow older, our financial priorities change. It looks like this is especially the case for grandparents who are big fans of investing accounts like Child SIPPs and the Junior Stocks and Shares ISA.
Here’s what you need to know about investing money in these accounts and how you can learn some lessons from the older generation.
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What is a Child SIPP?
This is often referred to as a Junior SIPP. With SIPP standing for ‘self-invested personal pension’, it is essentially a pension savings account for children. This may sound a bit ridiculous to have at such a young age but it’s a really smart option.
These nifty accounts work like this:
- You can invest up to £2,880 per child per tax year;
- 20% tax relief will apply, topping up the account to give you a potential total of £3,600;
- Investments are then free from UK income and capital gains tax;
- The other benefit is that gifts into a Child SIPP can fall outside your estate for inheritance tax (IHT) purposes;
- Money in the account can only be withdrawn once the holder turns 55 (rising to 57 in 2028) .
Even with just a small amount deposited, the fund would potentially grow to a high level by the time your child reaches retirement age. This is due to the power of compound interest over time. You can check out some more information on the compound interest formula here.
How does a Junior Stocks and Shares ISA work?
These accounts work in a similar way to a normal stocks and shares ISA but with a few tweaks:
- The maximum deposit amount is £9,000 per tax year;
- Your child or grandchild cannot gain access to the funds until they turn 18.
The biggest issues to consider when considering this type of account are:
- Locking the money away means they’re not very flexible;
- Investment selection must be wise as some choices could lose value.
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Why do grandparents favour the Child SIPP & Junior Stocks and Shares ISA?
According to research from Scottish Friendly, 47% of grandparents increased their investing contributions for their grandchildren over the past year. Child SIPPs were the most popular accounts and Junior Stocks and Shares ISAs were a close second.
This makes sense because these accounts provide an excellent way for grandparents to pass on some of their wealth. Using these allowances is a secure and tax-efficient way to provide for your family and potentially create multi-generational wealth.
The structure of these accounts prevents the holders from dipping into the money early. So grandparents can rest assured that this money saved away and invested can only be used when the time is right and the recipients reach a mature enough age.
Which is the best Junior Stocks and Shares ISA or Child SIPP?
This is going to depend on your circumstances and goals. Ideally, aiming for an account with low fees is going to help your child’s investment pots grow more over the long run.
It may also be worthwhile setting up your own share dealing account on a platform that also offers these junior accounts. This way, you can have everything set up in one place to make things easier to manage and track.
Hargreaves Lansdown is one example of a provider that offers a great stocks and shares ISA along with the different types of junior accounts. Just keep in mind that with any investments the value can go down as well as up and you may get out less than what you put in.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
