Bonus episode: Should you save into a Junior ISA or a Junior SIPP?

The following is a transcript of a bonus podcast episode of The Pension Confident Podcast. Listen to the episode, watch on YouTube or scroll on to read the conversation.

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PHILIPPA: Welcome back. With the kids back at school, now is the perfect time to think about the future. So, if you want to save for a child, should you be thinking about a Junior ISA, a ‘JISA’, or a Junior SIPP? Now, like Adult ISAs, JISAs let you save or invest tax-efficiently in a child’s name. It gives them a pot for when they’re older. Then again, regular listeners to the show will know we often talk about the magic of starting a pension early in your working life. So, think how much more powerful that could be if you started saving into a pension for a child from the day they were born. So, which to choose?

I’m Philippa Lamb, and if you haven’t subscribed to the podcast, why not click that button before we start? Here to help us weigh up the options is Maike Currie, VP Personal Finance at PensionBee. Welcome back.

MAIKE: Great to be here.

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Junior ISAs and Junior SIPPs at a glance

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PHILIPPA: Should we start with the basics? The really key differences between a JISA and a Junior SIPP?

MAIKE: Sure, let’s start with the Junior ISA, or JISA as you say. So, these work very similarly to adult ISAs. You can get a Cash JISA, or you can get a Stocks and Shares JISA. You can save into one or the other, or combination of the two. But you can’t, for example, have two Cash JISAs in a year -

PHILIPPA: OK -

MAIKE: there’s a limit to how much you can put in for a child in a year. At the moment, it stands at £9,000 (2026/27). A Junior SIPP stands for Self-Invested Personal Pension. And much like an adult pension or SIPP, you can contribute up to £2,880, and with government tax relief, that’s an extra £720, takes you to £3,600.

Now, the key difference between a JISA, a Junior ISA, and a JSIPP, or Junior SIPP, is access. Your children can access the Junior ISA when they reach age 18, when it becomes an adult ISA and moves into their name. With a Junior SIPP they have to wait until retirement age, which as it stands is age 55, going up to age 57 [from April 2028]. But we know that for children today, that retirement age might very well increase.

PHILIPPA: So, the big difference is that, isn’t it, as you say, that’s a huge difference -

MAIKE: it’s a huge difference -

PHILIPPA: they can have the cash at 18 [years old], or they’ll have to wait until retirement.

MAIKE: It’s all about access. Obviously, because they can’t access the cash until they reach retirement age, that money has a long time to grow and to utilise the power of compound interest, which we know is really powerful over the long term.

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How Junior ISAs and Junior SIPPs are taxed

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PHILIPPA: So, look, before we go any further, paying into a [Junior] SIPP, that doesn’t affect how much you can save into your own pension, right, and still get tax relief?

MAIKE: No, these are separate allowances, so whatever you put into your child’s Junior SIPP or Junior Pension won’t affect your own pension allowance.

PHILIPPA: OK, so here’s the first big question. The way the savings are taxed in a Junior SIPP versus a Junior ISA, it’s really different, isn’t it? So, should we get into that? Should we start off with JISAs? How do they work tax-wise?

MAIKE: So, the beauty of a Junior ISA is whatever you put into the Junior ISA is in that tax-efficient wrapper. So, any growth in the Junior ISA is free of interest, dividends, and when your child wants to access it, when they become age 18, they can take the money out without paying any tax. 

The other key thing to remember about a Junior ISA, because a lot of us won’t be able to contribute the full £9,000 a year, which is the allowance (2026/27). Once the Junior ISA is set up, anyone can contribute. So, it could be a guardian, a godparent, a grandparent, or a really generous aunt or uncle.

PHILIPPA: OK, that’s really good to know. Junior SIPPs, they’re different from a tax perspective, aren’t they?

MAIKE: They are. So again, with the Junior SIPP or the Junior Pension, they work much the same to regular pensions, I guess. So, when the money is in there, it grows tax-free, but when your child wants to take the money out when they reach retirement age, they’ll [likely] be able to take a lump sum tax-free, but the rest of the pension they’ll pay tax on in line with what tax rate they pay, whether they’re a basic rate taxpayer or a higher rate taxpayer.

PHILIPPA: OK, so I can see how people might think, you know, if we’re comparing the two, Junior SIPP tax relief looks great, but what’s the point if they’re going to be taxed at the other end when they access their savings in retirement?

MAIKE: The point, Philippa, is compound growth. Because that vehicle will be there over the long term, and pensions are really powerful to unlock the power of compound interest. So over time, that investment is likely to grow. And some numbers that have been crunched in the past is if you put the full £2,880 plus the £720 in the form of tax relief, which gives you that £3,600 a year - which if we work it out, that’s about £240 a month. Over time, if you put that in, there’s some interesting numbers crunched by Unbiased, and you get a 4% return, which of course accounts for things like inflation and platform fees, that pension, by the time your child is at retirement age, could be worth more than £500,000.

PHILIPPA: And that’s just you making contributions until they’re 18 [years old]. You stop at that point?

MAIKE: That’s right. So, you’re putting in contributions every year until your child is age 18. You stop completely, and just because of those initial contributions, the power of compound interest, and the beauty of returns, your child could have half a million pounds in a pension.

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PHILIPPA: The government loves tinkering with pensions. In the last five years alone, we’ve had an increase to the annual allowance, the scrapping of the lifetime allowance, and upcoming changes to pensions and Inheritance Tax. That’s not to mention the five Prime Ministers and six Chancellors!

If you want to stay in the loop on all the pension changes that could affect you  coming out of Downing Street - both the good and the bad - then join me, Philippa Lamb, on The Pension Confident Podcast. Subscribe today wherever you like to get your podcasts.

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Cash Junior ISA versus Stocks and Shares Junior ISA

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PHILIPPA: So, thinking about JISAs, you’ve got options, as you described earlier. You need to decide if you want to save or you want to invest for your child, don’t you?

MAIKE: That’s right. So, when we’re talking about JISAs, you’ve got the two options: a Cash JISA or Stocks and Shares JISA. With SIPPs, there’s only the option to have Stocks and Shares. Now, I’d say the two biggest mistakes parents make when it comes to Junior ISAs is they tend to put the money into a Cash Junior ISA. Now, if your child is very young and you’re investing into a Junior ISA, remember that they’ve got 18 years to ride out the ups and downs of the stock market, and we know historically that returns in the stock market will outperform cash over the longer term.

PHILIPPA: You can see why people do it, can’t you? Because it feels safer, doesn’t it?

MAIKE: It feels safer. So, it’s money you’re putting away towards your child’s future, so you might feel naturally that cash is the better option. But remember, there’s an 18-year time horizon. The second mistake that people make when they’re considering investing for their children is to invest for their children before they’ve put something away for themselves. And we always use the analogy of the oxygen mask. Put the oxygen mask on yourself first before you put it on the child. So, yes, Junior ISAs and Junior SIPPs are great vehicles to invest for a child but make sure you’ve put something away for yourself first.

PHILIPPA: So, the point, remember, about cash, as we say, it might feel safer. Inflation’s the enemy there, isn’t it?

MAIKE: Inflation’s the enemy because remember, over the long term, over that 18-year horizon, or even the longer horizon of the Junior SIPP - prices go up. Prices going up is inflation, and inflation chips away at the buying power of money, of cash. So, if you really want a chance of that money keeping a pace of inflation, you’ve got a better chance if you put the money into the stock market.

PHILIPPA: So, invest it rather than just save it.

MAIKE: Absolutely.

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How to decide between a Junior ISA or Junior SIPP

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PHILIPPA: Should we just go over the key points again if you’re trying to decide between the JISA and the Junior SIPP?

MAIKE: The key thing to remember really is access. So, what do you want to use this vehicle for? What do you want it to help your child with? If you want to help your child, for example, with getting a foot on the property ladder or with paying university fees, then a Junior Pension or a Junior SIPP isn’t going to cut it because the money is locked away until they reach retirement age. And in that case, a Junior ISA will probably be more appropriate because you’ve got access.

PHILIPPA: OK.

MAIKE: And it’s also often said that if you put money into a Junior Pension, especially grandparents, it’s probably the most selfless gift you’ll give because you’re not going to be around for them to thank you.

PHILIPPA: Yes, I guess the key point there is to tell them you’re doing it.

MAIKE: 100%.

PHILIPPA: So, tips on picking?

MAIKE: Well, not to give any investment advice, but I’d say when you’re investing for a child, there are two key things to remember, and that’s diversification, spreading the investments. So yes, something like a global tracker fund or globally active managed fund could be quite good. Diversification and then keeping costs low. So, a passive fund where the fees are really competitive, because over the long term, the golden rule to investing is to spread your investments through diversification and to keep costs low. Because over an 18-year time horizon, if we’re talking about Junior ISAs, or even a longer time horizon of 57+ years, those fees will chip away at returns.

PHILIPPA: OK, I’m going to be cheeky now because I know you have children. What did you go for?

MAIKE: Oh, I definitely went for a Junior ISA. I do want them to thank me, and I’m prioritising my own retirement.

PHILIPPA: OK, and in terms of how it’s invested?

MAIKE: Well, definitely diversification is key, so I’ve gone for a global fund, and to keep the costs low, I’ve gone for a passive vehicle, a tracker or an exchange-traded fund (ETF). I also want to tap into those thematic themes that I think could be really interesting over the lifetime of the Junior ISA, so a little bit of exposure to healthcare and technology.

PHILIPPA: OK, personal choices for you, obviously.

MAIKE: Personal choices, not investment advice.

PHILIPPA: And there we have it. Something to think about when deciding on the best ways to save or invest for a child or grandchild. Big thank you to Maike, as always.

If you’re enjoying the series, we’d love it if you’d let us know that with a rating, maybe a good review. They really help us reach more listeners like you. If you’ve missed an episode, don’t worry. Catch up anytime on your favourite podcast app. You can go to YouTube. If you’re a PensionBee customer, you can listen in the PensionBee app too.

Here’s our final reminder. As usual, anything discussed on the podcast shouldn’t be regarded as financial advice or as legal advice, and when investing, your capital is at risk. Thanks for being with us. We’ll see you next time.

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Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.