Aberdeen Adviser has called on the Government to close the gap between the Junior SIPP and Junior ISA allowance.
As the UK grapples with a retirement savings challenge, coupled with a cost of living and employment crisis, the adviser platform said raising the Junior SIPP allowance to level up with Junior ISAs would highlight the importance of pensions.
The Junior SIPP and Junior ISA were both launched in 2011 with a £3,600 annual allowance. However, the Junior ISA allowance has since almost trebled to £9,000, while the Junior SIPP allowance has stayed the same.
Taking inflation into account, the Junior SIPP allowance is worth 49% less than it was when it was launched, Aberdeen Adviser said.
Currently if the full £3,600 allowance is paid in for 18 years without further contributions and earns a return of 5% a year over 50 years it results in a £1.2 million pension pot. But taking inflation into account – assumed at 2.5% per year – that would be worth the equivalent of £280,000-300,000 in today’s money.
Noel Butwell, CEO of Aberdeen Adviser, said: “The Junior SIPP should be the ultimate foundation for giving young people financial security in later life. We would like to see a product neutral approach which recognises the importance of each for long-term planning.
“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.”
Verona Kenny, chief distribution officer at Aberdeen Adviser, said: “The Junior ISA and Junior SIPP are great tools for people to start planning for their loved ones’ futures and help set them on the right path. It’s also a way for people to pass on their wealth for the next generation in a structured way.
“But the gap in allowances isn’t helpful and doesn’t take into account the impact of inflation over a lifetime especially when it comes to pensions. By levelling the allowances for both the Junior ISA and Junior SIPPs to £9,000, including tax relief for SIPPs, it would bring simplicity and flexibility.”
Aberdeen Group is also recommending the Government include pensions and long-term savings in the National Curriculum from 2028 and has made representations in its response to the Treasury Select Committee call for evidence on the Financial Inclusion Strategy. Currently, only mortgages, budgeting and compound interest are set to be included as part of a shake-up of compulsory Citizenship studies.
It follows research from Aberdeen which has shown a stark £45,000 difference in average pension pots between those with ‘very good’ financial literacy and those with ‘very poor’ financial literacy.
Butwell added: “Of course, many people may struggle to pay into their own pension, let alone their loved ones’, something that is also the case with Junior ISAs. To make real inroads for all, we also need to get pensions and long-term savings on the National Curriculum, across all home nations. Knowledge is power and this would be an emblematic shift in a world where people will increasingly have to look after their own financial future.”
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