New parents have plenty to worry about when it comes to their children, but one they should not forget is to financially contribute to their children’s future.
There are two main ways that parents can do this. The first is through a junior ISA (JISA), while another consideration could be a junior self-invested personal pension (junior SIPP).
For parents to decide which option is best, it is important to understand how each operates, as well as their wider benefits and drawbacks.
JISAs allow parents to contribute up to £9,000 per tax year either in cash or stocks and shares accounts. Children are able to take control of the assets from 16 and can start making withdrawals from 18. These withdrawals are tax-free, but Daniel Hough, financial planner at RBC Brewin Dolphin, noted the early age of access can lead to kids spending the money on things parents disapprove of.
“In a previous role, I received lots of calls from parents about what their children were using their money for once they were able to access their JISAs and junior savings accounts,” he said.
Yet this option may be better for grandparents. Hough noted: “It can be incredibly rewarding to see grandchildren enjoy the fruits of your hard work over the years.”
By contrast, Junior SIPPs limit maximum annual contributions to £2,880 which is then topped up by the government by another £720. Children can currently access the money at the age of 55, making them a longer-term method of financially contributing to their children’s future.
They work the same way as traditional pensions, with people able to take out a tax-free lump sum of 25%, with the remainder liable for income tax.
While this means SIPPs have a greater impact on children’s potential retirement, parents are less likely to see their children enjoy the results of their savings as a result.
As such, the better choice “comes down to how accessible you want the money to be”, Hough said, suggesting the answer may lie in a combination of both the JISA and junior SIPP.
By using up their annual SIPP allowance, and then contributing the rest of their children’s savings into a JISA, parents will allow their children to access some money for their personal use at age 18 and still have a pot of savings left for their retirement.