Parents and grandparents looking to reduce future inheritance tax bills have a powerful but underused option: paying directly into a child's or grandchild's pension.
Andrew Oxlade, a director at Fidelity Personal Investing and former editor of This is Money, argues that gifting into a Junior Self-Invested Personal Pension (SIPP) outperforms the more widely used Junior ISA on both tax efficiency and practical safety. He says pension money is protected from impulsive withdrawals, offers some shelter in the event of divorce, and benefits from an instant government top-up unavailable to ISA savers.
Why gifting is becoming more urgent
Inheritance tax has become a sharper concern for British families. A rule change taking effect in April 2027 will make pensions potentially liable for inheritance tax for the first time. The Office for Budget Responsibility expects the total tax take from estates to rise 67 per cent by 2030, collected from around 65,000 estates, roughly double the current number. June was a record month for inheritance tax revenues, according to Oxlade.
One well-established way to sidestep the levy is to make gifts at least seven years before death, after which the money generally falls outside the estate. Families can also give £3,000 a year without restriction.
Three reasons to choose a pension
The first reason Oxlade cites is the lock-in. Unlike a Junior ISA, which converts to an adult ISA at 18 and can be withdrawn immediately, pension money cannot be accessed until the minimum pension age, currently 55, rising to 57 on 6 April 2028 and likely higher still by the time today's young people retire. "Gifting directly into a pension is effective in mitigating this risk," Oxlade writes. "There is no access to this money for decades."
The second advantage is some protection in the event of divorce. While pension assets can be included in divorce settlements, especially after long marriages, their long-term nature means they may be treated differently from readily accessible savings. Oxlade acknowledges the outcome depends on the circumstances and there is no guarantee of exclusion.
The third is the tax boost. Under Junior SIPP rules, contributors can put in up to £2,880 a year and the government automatically adds 20 per cent tax relief, lifting the total to £3,600. The child does not need to have any earnings to qualify. "It is one of the few opportunities to secure an instant, Government-backed return before a child has even earned their first pay packet," Oxlade writes.
How the numbers stack up
Fidelity ran projections comparing three years of maximum contributions into a Junior ISA and a Junior SIPP, starting when a child is 15.
A parent contributing £2,880 a year for three years puts £8,640 into a Junior ISA. The same cash going into a Junior SIPP becomes £10,800 after tax relief is added. At 7 per cent annual growth to age 65, the Junior SIPP pot could reach £297,777, against £238,222 for the Junior ISA, a difference of nearly £60,000. At a more conservative 5 per cent annual return, the Junior SIPP reaches £118,044 compared with £94,435 for the ISA. Investment charges would reduce these figures and growth is not guaranteed, Oxlade notes.
For families worried a child will simply spend any windfall, Fidelity's own platform data offers some reassurance on the ISA side as well. Of 6,000 customers whose Junior ISA converted to an adult ISA after 2021, only 9 per cent cleared out the account entirely, while 35 per cent added further money.
A word of caution
Oxlade urges families not to let tax strategy override sound financial judgment. Gifts should only be made if they are genuinely affordable and leave the giver's own plans intact.
He also notes that inheritance tax affects fewer estates than many people assume. In 2023/24, around 30,400 estates paid any liability, a fall of more than 1,000 on the prior year. Only 4.7 per cent of all estates faced any inheritance tax. Once allowances were applied, the average effective rate paid was 13 per cent, well below the headline marginal rate of 40 per cent. Married couples who pass on their main home to children or grandchildren can shelter up to £1 million.
The picture will change after April 2027, when the new pension rules widen the tax net. Oxlade's broad recommendation is a combination of approaches: some money toward near-term goals such as buying a home, some channelled into a pension for long-term security, and perhaps some for immediate enjoyment.
