I’m all for parents – and grandparents – doing their bit to demonstrate to kids and grandchildren the value of long-term saving.
It’s why I am a big supporter of Government-backed initiatives such as Junior Isas (Jisas) and junior pensions (formally known as Junior Self-Invested Personal Pensions, or Sipps) that allow parents to launch their children on a savings journey – and for grandparents and friends to chip in along the way.
Yet investment house Aberdeen believes it is time for one of these two ‘great savings tools’, the junior pension, to be given an upgrade. It is calling for the junior pension annual allowance to be increased to £9,000 in line with the Jisa limit.
It’s a move which Aberdeen says would help families ‘set up their loved ones for a lifetime of pensions saving’ and help address the chronic shortfall in most people’s pensions when they come to retire.
Currently, parents can set up a Junior Isa for a child as soon as they are born and then fund it to the tune of £9,000 per tax year. Grandparents and friends can also chip in with contributions which can either go into a stocks and shares or cash Jisa, or a mix of the two.
As with Isas, everything that sits inside a Jisa is protected from tax, with the child taking control of the plan from age 16 and then being able to access it from 18.
The rules for junior pensions are similar in that it must be a parent who opens the plan, with grandparents and friends also allowed to contribute to it once it’s up and running.
At the age of 18, the child then takes over responsibility for funding it, although they will not be able to access their pension pot until age 57 (maybe later if a future government pushes back the access date).
The beauty of Junior Isas is that the government gives contributions a helping hand in the form of 20 per cent tax relief. So while the maximum annual contribution is set at £2,880, this is then topped up to £3,600 with tax relief.
Aberdeen’s argument for the annual limit to now be increased to £7,200 (with £1,800 of tax relief on top) is sound. When Jisas and junior pensions were launched in 2011, the annual contribution limits were both set at £3,600. Yet while Jisas got a refresh in April 2020, resulting in the current £9,000 annual allowance, junior pensions were left untouched. Noel Butwell, chief executive of Aberdeen’s investment platform business Aberdeen Adviser, believes a refresh of junior pensions is now due.
On Friday, he told me: ‘The Junior Sipp provides a fantastic platform for families and their children to build on.
‘It creates a foundation that young people can add to throughout their working lives, building financial security and addressing the uncertainty of future state provision.
‘We would like to see a product-neutral approach which recognises the importance of each [Jisas and Junior Sipps] for long-term planning.’
Will Labour hear Aberdeen’s call? I doubt it, especially while Rachel Reeves remains Chancellor of the Exchequer. Since entering No 11 Downing Street, Reeves has done nothing to encourage the pension savings habit – and a hell of a lot to discourage it.
In her first Budget she launched a nasty tax crackdown on inherited pensions which will kick in from April 2027. In November she followed this up with a 2029 curb on salary sacrifice pensions which will discourage employers and employees from contributing into workplace pensions.
What Reeves has up her sleeve for pensions in this year’s Budget is anyone’s guess. But I can’t believe for one moment that a more generous junior pension allowance will be on the agenda, especially with the total cost of pension tax relief forecast to total £59.1 billion in the tax year ending April 5 – a near 7 per cent rise on the year before and 22 per cent higher than the equivalent tax take in the year ending April 2021.
This is a Chancellor and a government that, on the one hand, does everything within its power to discourage private pensions, but on the other acknowledges that some 15 million adults are currently not saving enough to secure themselves an adequate income in retirement. Something doesn’t quite stack up.
One last thought on saving for children. Don’t forget NS&I Premium Bonds. I buy them for my partner’s grand-daughter Millie whenever I feel flush – which isn’t often these days.
> The best Junior Isas as compiled by savings expert Sylvia Morris
And the REAL reason cash Isas are being capped
Has the Chancellor been totally upfront with us over her controversial decision to trim the annual cash Isa allowance from £20,000 to £12,000 for all bar the over-65s? A haircut which kicks in from April next year.
Not according to Jason Hollands, managing director of online investing platform Bestinvest. He believes the move has more to do with cutting the cost to the Treasury of the tax breaks rather than encouraging a boom in investing by prioritising stocks and shares Isas – the reason Rachel Reeves gave as the reason for the changes.
Hollands says this following the release of data from HM Revenue & Customs which shows that the tax saved by individuals as a result of sheltering savings and investments inside tax-free Isas is forecast to hit £9.5 billion in the current tax year – twice the amount saved five years ago.
He argues: ‘The Chancellor has sought to justify the cut to cash Isas as entirely driven by a desire to encourage more savers to become investors and enjoy higher potential returns.
‘However, the insights from these tax relief statistics will only raise suspicions that the real motivation to cut the cash Isa allowance is to curtail the “cost” to the Treasury of Isa tax reliefs.’ Commentary accompanying the statistics support what Hollands is saying. It reads: ‘The cost of Individual Savings Accounts (Isas) has generally increased over time, with large increases in recent years [my emphasis]… due to rising interest rates, and policy decisions to decrease the [annual] dividend allowance from £2,000 to £500 and the capital gains annual exempt amount from £12,300 to £3,000.’
He is not a lone voice. Michael Summersgill, boss of investing platform AJ Bell, has already let Reeves know what he thinks of her forthcoming Isa revamp.
In a letter recently sent to her, Summersgill describes the changes as ‘unwieldy’ and says they are ‘doomed to fail in their aim of encouraging more people to invest for the long term.
‘Rushing to implement these changes represents the worst kind of policy-making’.
As for the Treasury’s intention to tax any uninvested cash held in a stocks and shares Isa, he questions if this will prevent providers from marketing their wares as ‘tax-free’.
I get the whiff of another policy U-turn on the horizon. But I will leave the last word (56 words to be exact) on Isas to Hollands.
‘With the UK tax burden at a post-war high, dividend and capital gains exemptions cut by the last government, a higher rate of capital gains tax introduced in 2024 and now increased tax rates for savings interest and dividend income, it has never been more important to make as much use of Isa allowances as possible.’
Heed what he says.
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