JISA or Child Pension – which should you choose?

Business | 10/29/2020

JISA or Child Pension – which should you choose?

When it comes to saving, it’s easy to get caught up in planning only for yourself and your partner, or only thinking about the early stages of potential family life. But what about your children’s long-term financial future? If you don’t start thinking about providing a solid financial foundation for them now, it’s highly likely you will get stung later in life and have to help out then instead (think assisting with a house deposit…)

So, if you’re beginning to consider saving for your child’s future, there are a number of options available.

Your options

Whilst a savings plan is a flexible way to put away money over the years, current low interest rates mean that the money is unlikely to grow much by itself. Therefore, you should look at options with the potential for longer-term tax-efficient growth. The two most common are Junior Individual Savings Accounts (JISAs) and Child Pensions. But how do you know which is best?

What’s the same?

Firstly, there are a few commonalities between the two:

  • Both a JISA or a child pension can only be set up by someone with parental responsibility for a named child who satisfies the eligibility criteria
  • You can usually begin saving for your child by inputting a relatively modest amount.
  • Both are tax efficient as they are not subject to any income tax or capital gains tax liabilities on any investment growth
  • When paying into a JISA or a child pension, this does not affect your own personal ISA or pension allowance – they are treated completely separately
  • Other relatives can also pay into these solutions providing the total fund contribution does not exceed the annual allowable limit per child, which is set out below
  • Both can be invested into stocks and shares, however, these should be considered as longer-term options
  • Both can be transferred to another provider at a later stage if you or your child wishes

What makes them different?

There are a number of important differences between a JISA and a child pension which you should take into consideration when deciding which is the most viable saving option for your child.

A JISA allows you to contribute up to £9,000 in the 2020/21 tax year per child, whereas a child pension only allows you to save up to £2,880. However, a child pension receives a government tax relief of 20% which means if you invest £2,880 then £3,600 is then invested per year per child.

Once your child reaches 18 years old, you’ll no longer be able to pay into a JISA for them. However, with a child pension scheme, there is no limit on when you can pay into it, so you can continue paying on their behalf for as long as you wish (although you should be aware that tax relief will be based on the child’s circumstances and subject to the rules on annual allowances).

There is no limit on the amount that can be built up over a lifetime for a JISA (outside of the yearly allowance) and it is tax free on withdrawals. A pension however, is only tax free up to 25%, with the rest being taxed as income. As well as this, withdrawals over £1,073,100 (indexed with inflation) will attract a tax penalty of either up to 55% when taken as a lump sum or 25% as well as paying the marginal rate of income tax, if taken as income.

If you are saving into a JISA for your child, they will have the opportunity to take the reins of their own strategy from the age of 16. However, they’ll not actually be able to receive access to the funds until their 18th birthday, at which point, they can either spend the money as they wish, or have the option to transfer to an adult ISA.

A pension on the other hand, offers your child to take control of their strategy from 18 years old, but the funds cannot be touched until they reach 57. This given age could of course increase in the future, so you should consider carefully exactly what your intention for these funds will be in the future (ie. if you’d like the fund value to contribute towards a house deposit for your child in their 20’s, then a child pension would not be a viable option). However, if you were to pay the full maximum amount of £2,880 (£3,600 with tax relief) into a child’s pension from birth until they reach 18, and the investments achieve annual growth of 5%*, the child will have a pension worth more than £580,000 by the time they reach 55 – an amount not to be sneezed at!).

Which should you choose?

When assessing both your options, the key things to really take into consideration are; the goals you envisage for your child, the age at which they will be when they plan to withdraw and the tax treatments applicable when they do so.

A JISA may provide your child with a great start to adult life but a child pension could help fill a savings gap in later years. As future generations are now beginning to live that bit longer, there is an ever increasing need for more money in retirement years.

So, as you start to map out an early savings plan, you should perhaps consider both solutions – not only making a substantial contribution to early adult years,  but also giving them the financial security in future decades too.

Working with you, we can help make the right decisions when it comes to supporting your family and their financial future. If you’d like to know more, contact us today.

 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

*This figure is an example only and not guaranteed – it is not a minimum or maximum amount. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.

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