Parents Can Establish Pension Pots for Children to Potentially Reach Millions

Parents can establish substantial pension funds for their children, potentially reaching millions by the time they retire, by making consistent monthly contributions to Junior Self-Invested Personal Pensions (SIPPs). This strategy, involving saving as little as £240 per month until a child turns 18, may also reduce inheritance tax liabilities.

One approach involves contributing to a Junior SIPP for a child. On their 18th birthday, these pension pots transfer to adult SIPPs, becoming the child's property, though the funds remain inaccessible until retirement age. For instance, a parent aiming for a £7 million pension pot for their child by the time they reach retirement age could achieve this by saving £240 per month until the child's 18th birthday, assuming a hypothetical annual growth rate of 10%. This would result in a fund of approximately £87,000 by age 18, which, with continued growth, could reach £7 million by the time the child reaches 65.

This method can also offer inheritance tax advantages. Contributions to a Junior SIPP are typically made from an individual's net income after tax. Once the money is in the pension, it is usually outside the contributor's estate for inheritance tax purposes, provided the contributor survives for seven years after making the gift. This allows assets to grow free from inheritance tax.

For example, Ruth Jackson-Kirby, a parent, has set up pension plans for her young children, Henry, aged five, and Evelyn, aged three. Her mother is responsible for making the monthly contributions. This approach aims to provide her children with a significant financial head start for their retirement.

This strategy is particularly effective for those looking to pass on wealth while minimizing tax burdens. By utilizing Junior SIPPs, parents can effectively gift assets to their children that grow tax-efficiently and are eventually removed from their own taxable estate, provided certain conditions are met regarding survival periods after gifting. The effectiveness of this strategy relies heavily on consistent contributions and the assumption of sustained investment growth over many years.