Junior ISA vs Junior SIPP: deciding which is best for your loved one is quite the future-focused task. You’re laying out some seriously long-term plans for their funds — but also offering the potential for some big benefits in the long run.
The key questions are when would you like them to access the money, what would you hope they use it for, and in which way do you feel comfortable contributing? Let’s dive into comparing the two.
- What is a Junior ISA?
- Junior ISA benefits
- What is a Junior SIPP?
- Benefits of a Junior SIPP
- Key differences between the two
- Considerations of each account
- Can you have both?
- Which one should you choose?
What is a Junior ISA?
Junior ISAs are like the child equivalent of ‘adult’ ISAs. Available to children in the UK under the age of 18, up to £9,000 can be deposited into the account tax-free, each year.
The account is managed by either a parent or legal guardian, and on the child’s 18th birthday the money is moved to a mature ‘adult’ ISA, at which point it’s theirs to withdraw or keep growing by leaving it in an ISA or moving it to an adult SIPP (Self-Invested Personal Pension).
The person managing the account on their behalf can’t access the money or withdraw anything, but they can transfer it to a better-suited provider.
Junior ISA benefits
Aside from using the account as a tool to help teach your child financial literacy, there are some further key benefits to a Junior ISA:
You can save and/or invest up to £9,000 year tax year
- Junior Cash ISAs are for saving (earning interest on their cash).
- Junior Stocks and Shares ISAs are for investing (earning dividends, interest, etc. on the funds).
- If you have multiple goals for the child, you could open one of each type.
They’re tax free!
There’s the potential for up to 18 years’ worth of savings/investments, plus any interest and/or gains being completely free from capital gains tax or income tax on withdrawal.
Tax treatments depend on individual circumstances, and it may be subject to change in the future.
The money’s locked in until they turn 18
The parent or guardian managing the account can’t withdraw any money from it. They’ll just be managing it on their behalf until they turn 16, at which point the child can choose to take over management if they’d like to or leave it to the grown up for a couple more years.
That said, no matter who’s managing it, there are no withdrawals until the child turns 18 and the account matures into an ‘adult’ ISA.
If the long-term goal is to give them a boost of financial independence as they enter adulthood – be that money for new wheels, university, travelling, or getting on the property ladder – then a Junior ISA could be well-suited compared to a Junior SIPP.
Friends and family members can contribute too
Depending on the Junior ISA provider, they may offer a way for you to invite family members and friends to deposit into the account, too. It takes a village, after all!
What is a Junior SIPP?
Just like an adult version of a Self-Invested Personal Pension (SIPP), a ‘Junior SIPP’ is a personal pension pot — but one that’s designed for someone under 18.
Separate from their State Pension and workplace pension scheme(s), the Junior SIPP can usually be accessed by the child from the age of 55 (57 from 2028 and subject to rise further in the future).
Benefits of a Junior SIPP
Junior SIPPs come with a few key benefits, and while they aren’t completely tax-free, they are tax-efficient:
Tax-relief top-ups
If the parent or legal guardian wishes to, the Junior SIPP can also benefit from the 20% tax relief top-up from the government.
This means that for every contribution that’s made (up to the annual limit), their money will be topped up for free!
The maximum annual limit is currently £2,800 — but with the tax relief top-up, that jumps up to £3,600.
Time in the market
Arguably the main benefit of a Junior SIPP is how much time the fund has to potentially grow. From birth until just before their 18th birthday, parents, guardians, or even other family members can contribute to the account up to the annual limit.
If the limit stays at the current amount of £2,880 and the account manager opts in for the government tax relief top-up, that would bump it up to £3,600 per tax year.
And £3,600 multiplied by 18 years is £64,800!
Not only that, but the investment potential between 18 to retirement age could be staggering by the time they come to withdraw. It’ll just be a waiting game for your little one.
More flexibility for how it’s invested
Just like an adult Self-Invested Personal Pension, the Junior SIPP also offers more options of how to invest the funds.
While ‘adult’ SIPPs are often used by self-employed individuals, they are also used as Personal Pension pots for people to save in addition to their workplace scheme. Especially if the workplace one leaves the person feeling restricted by how, where, and when their money is invested.
Whether you’re self-managing or have a fund manager looking after things, the same benefit is offered in Junior SIPPs, and the provider you opt for should be able to offer you a range of flexible options for this.
Key differences between a Junior ISA and a Junior SIPP
Junior ISA and Junior SIPP considerations
Junior ISA considerations
- They can only have one of each type open at any given time (e.g. one Junior Cash ISA and one Junior Stocks and Shares ISA open). Transferring to a new provider is very straightforward though.
- Your child can’t have a Child Trust Fund (CTF) and Junior ISA open at the same time. As the CTF is being phased out, transferring it to a Junior ISA would effectively close the CTF.
- Withdrawals are controlled by the child after they turn 18. At that time, it’s up to them how they manage the money.
Junior SIPP considerations
- The money can’t be withdrawn until the child reaches retirement age (currently 55 and set to rise in the future).
- The money held is not ‘tax-free’ in the same way a Junior ISA offers. In a Junior SIPP, the first 25% that’s withdrawn is tax-free (up to a maximum of £268,275) [1]. The remaining 75% withdrawn is subject to income tax.
Can you have a JISA and a Junior SIPP?
Yes, you can. In fact, many people opt to open both accounts for their children. You can decide how to deposit into each account depending on your budget. There just may be minimum contributions levels that each provider sets, respectively — as well as staying in the annual limits for each type.
While Wealthify only offers a Junior Stocks and Shares ISA, the option is available to you.
- For those who can afford to, a strategy people use is to max out the Junior ISA up to the annual allowance of £9,000 (due to its tax-free benefits and earlier withdrawal date, when compared to the Junior SIPP).
- Then add any excess to the Junior SIPP, up to the £2,880 limit, which with the government tax relief top-up, would bump up to £3,600. (As the Junior SIPP isn’t completely tax-free, unlike the Junior ISA, and has a much longer wait until the child can withdraw).
Remember, the Junior ISA’s allowance of £9,000 is the child’s ISA allowance — not the parent’s or guardian’s. The adult still gets to use their full entitlement of £20,000 per tax year for their own saving and investments.
Additionally, everyone in the UK has an annual gift allowance of £3,000 without needing to be declared to HMRC. This can be spread out to multiple children or gifted to one person as a whole sum.
These limits and allowances are subject to change in the future.
Junior ISA or SIPP: which is best for me and my child?
Ultimately, it’s your decision, but a key factor is when you’d like the child to be able to access the money:
- At 18, a Junior ISA is likely the better choice.
- At retirement age, a Junior SIPP would be better-suited.
- A blend of both? Perhaps spread your contributions between a Junior ISA and a Junior SIPP.
Remember, there are pros and cons to each account.
Junior ISAs
These are tax-free accounts that give your child an allowance of £9,000 per tax year to contribute. You can choose between a Junior Cash ISA, Junior Stocks and Shares ISA, or one of each (and spread the allowance between both).
The money belongs solely to the child and can’t be accessed before they turn 18.
Junior SIPPs
These accounts are tax-efficient personal pension pots that have the potential for long-term investment growth, a government tax relief top-up option, and offer flexibility in how the investments are set up.
You may want to consider how long the child will need to wait before accessing the fund, and the income tax that’s chargeable at withdrawal (after the first 25% that’s withdrawn).
How Wealthify can help
Wealthify proudly offers a Junior Stocks and Shares ISA — in fact, we’ve won ‘Best Junior ISA Provider’ six years in a row at the Personal Finance Awards. From our Ethical Investment Plan options to our low and transparent fees, there’s a reason why our Junior ISA is a top choice for our customers.
Please remember the value of your investments can go down as well as up, and your child could get back less than invested.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
References
1: https://www.gov.uk/tax-on-your-private-pension/lump-sum-allowance
