One of the more interesting responses I received quite surprised me, coming as it did from someone outside the industry: couldn’t we incentivise parents or grandparents to contribute into their children’s or grandchildren’s pensions? This idea recognises the existence of the “bank of mum and dad”, the generation of over-50s who hold the bulk of the UK’s wealth. On top of this, research from Oxford University commissioned by BNY Mellon shows that millennials are more than twice as likely to turn to their parents for financial advice as they are their bank.
This obvious and intuitive concept is available already in the form of a Junior SIPP. The child receives a tax relief top-up and benefits from the additional compounding effects of saving for longer; just 3 years of contributions at the maximum £3,600 a year including tax relief could be worth over £210,000 after 50 years, assuming a growth rate of 6%. What’s more, the child’s older relatives, being much nearer themselves to retirement, are more acutely aware of the need to save, and could donate regular gifts out of income without these counting towards inheritance tax.
Yet clearly from the way the suggestion was put to me there is little awareness of the rules among the public at large. Only a handful of the best known firms offer junior SIPPs. So why have they not been more popular? Tom McPhail of Hargreaves Lansdown tells me that JSIPP sales are running at a small fraction of adult equivalents, but are experiencing strong growth of late.
‘Investments for kids remains a relative niche activity, this is hardly surprising as many adults are struggling to save adequately for themselves, let alone their children. Where the resources are available it makes great sense to do it; not only does it exploit the leverage of long term compound growth, it is also good inheritance tax planning’, adds McPhail.
At a time when youngsters are typically faced with huge student debts and have set themselves other financial priorities such as saving for their first home, their parents and grandparents often do have surplus wealth and the desire to help their children out. In their 2015 paper “Understanding retirement journeys: Expectations vs reality”, ILCUK and Prudential research clearly shows that as people age, they spend progressively less of their income and save more. Higher earning households consume on average 67.7% of their income at age 50 against about 62.6% at age 80. The difference is more marked still for low-income households – spending 113.7% of income at age 50 decreasing to 75.7% at age 80.
As a means of starting to resolve the much talked-about inter-generational wealth divide, parental saving into pensions makes absolute sense. If only the Government and the industry could find a way to get this message out, could this go some way towards closing that huge savings gap?