Monevator reader James has a question about Junior SIPP asset allocation as follows:
In the good times I opened SIPPs for my children and I followed my standard policy of buying Vanguard Lifestrategy 60/40.
However, buying an investment to hold for 50 years or more is obviously very different from buying one for my elderly self. What are the considerations and options?
The Internet is weak on this one. But I have strong views!
Invest 100% in a global equities tracker fund. Then leave it to grow knowing you’ve done the best you can.
My reasoning is straightforward.
A Junior SIPP banks on the power of compound interest to multiply the pounds you invest with love into a legacy your child can enjoy when you’re gone and can do no more.
Play with our compound interest calculator. You’ll see that this money multiplier is twin-engined. Compound interest needs both time and a suitably high rate of return to truly work its magic.
The most exciting stuff begins to happen after 40 years. That is when the trail of wealth arcs up like the trajectory of a rocket ship – rather than a biplane bumping along the turf.
Even then, you’ll want to target the highest rate of interest (or rather investment return) you can reasonably hope for – without resorting to magical thinking.
And as far as I’m concerned that amounts to the 5% annualised return (after inflation) delivered by world equities for over a century.
Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends and interest, but strip out the vanity growth delivered by inflation that does nothing to grow your actual spending power.
Bonds have historically generated an annualised return of 1.5% after inflation. That rate of return will not compound quickly enough to make your kid comfy in their old age.
Here’s the graph of compounding bond returns. You’ll notice there’s no magic hockey stick effect – even after 60 years:
Time is on their side
It’s natural to be protective of your child’s money and to be more cautious with it than with your own.
But your child should have a lifetime of investing ahead. That makes their risk tolerance and time horizon very different from yours.
The kiddiwinks can’t touch their SIPP money until their late-fifties at best.1 The way the political weathervane is spinning, they may even be in their sixties by the time they’re permitted their allowance by our benevolent AI carers in the far future.
Tack on a 40-year long retirement and the contributions you put in now could still be making a difference in 90 to 100 years’ time.
Gulp.
The key point is that your child does not have a short-time horizon problem. So they don’t need to diversify like you do.
Most adults save for retirement over 30 to 40 years, tops. Even if you eat risk for breakfast, you should be easing back on equities for the last ten to 15 years.
Otherwise, cop a lost decade or two in the middle and the time-pressure is enough to make anyone panic. Hence the investment industry hit upon bond diversification to hold the crazy in check.
But this rationale does not apply to a child who doesn’t need the money for half a century or more.
If a big, bad bear market comes along – it won’t touch them in the long run. Junior’s pension money can be underwater for ten, 20, even 30 years and it doesn’t matter.
In fact, it may even help. The shares you bought will keep spinning-off dividends, which will be reinvested to rack up even more shares bought at bargain prices.
Meanwhile, lower returns in the present mean higher expected returns in the future – hopefully as your child hits their peak earning years.
Who’s gonna freak out?
Think about this, too: when your child’s equities are hit by a market convulsion, who’s gonna hit the panic button?
Not them.
They’re playing with Peppa Pig when it happens, or their mobile – or later with somebody else still many decades away from even thinking about thinking about retiring.
And when they do start work, they’ll be auto-enrolled into a pension fund that handles diversification automatically.
What are the chances they’ll even pay attention to the annual statements until their thirties begin to wear thin?
All you have to do is remain a steadfast steward of their SIPP until they hit 18. From that point on, they take charge. But they’re going to have better things to do. Much better.
If a temporary -50% portfolio blast probably isn’t going to bother them, then there’s no need to let it bother you. Historically, the market has recovered.
There’s a useful side argument here, too. Even with compounding, your efforts are likely to be the icing on a cake paid for by your child’s own lifetime of labour. And as mentioned, the bulk of their funds will be diversified by their friendly workplace pension company pals.
That relieves you of the pressure to play it safe. You may as well use your money to swing for the fences. (While still taking the sensible precaution of diversifying across every major stock market on Earth with that global tracker fund. I’m not suggesting taking a mad punt on crypto here).
It may help to conceptualise your child’s own future saving efforts as providing the floor that will underpin their retirement prosperity. In this model, your ultra-early contributions can form part of an ‘upside portfolio’ that will go towards the fun stuff.
Seen like this, you can again afford to take more risk on their behalf.
Take comfort in capitalism
Market history shows that the longer the time period, the more likely it is that investment returns will converge upon their historical average:
Data from MSCI. April 2023.
The chart shows the best, worst, and the simply average annualised results for every MSCI World rolling return path since the index launched in 1970.
The average annualised return across all 53 years is 4.5%.
But you can see on the left-hand-side that the average result exists within highly volatile polar extremes in the short-run. Returns range anywhere from 62% to -46% for a single year.
However these extremities are planed-off over time. There isn’t a single, negative timeline that lasts longer than 14 years.
Simply put, the longer your child remains invested, the more likely it is that they’ll get the average return.
Of course, there are markets with worse rolling returns out there if you want to frighten yourself.
We could talk about Japan’s shocking losses.
Or the German equity path that remained in the red for 79 years. Two devastating defeats in World Wars and hyperinflation will do that.
Less obviously, there’s an unbelievable French stock market timeline where you didn’t make money for 135 years.
The whole world is rooting for your kid
The solution in those grim outlying cases wasn’t to invest in the bonds of the blighted countries. Bonds were devastated, too.
The answer was to invest in the world.
Throughout history, someone somewhere has always held the baton for progress and kept humanity moving forward.
Whether it be the Greeks, the Romans, Byzantines, Arabs, Chinese, Enlightenment Europeans, or the Americans.
(Full disclosure: the author may or may not hold positions in some of these civilisations. Past performance is no guarantee of future success. Just ask the nearest moai.)
We can only focus on what we can control. If there is a global bear market that lasts 50 years, then 30% bonds and 10% gold almost certainly isn’t going to rescue anyone’s pension.
And so I circle back to 100% global equities and backing three wonders of the modern world: Capitalism, compound interest, and a low-cost index fund.
Take it steady,
The Accumulator
- The Minimum Pension Age is currently 57. [↩]
Not so long back I would have agreed 100% with TA.
Today, the looming long-term threats posed by the global climate and biodiversity crisis cannot be ignored when investing over such a lengthy timespan.
The age-old adage should be applied…past performance is not a guide to future performance and certainly should not be relied upon as a reliable indicator.
I beginning to think the Harry Brown portfolio allocation would be more appropriate for the longer term given all the uncertainties.
Personally I wouldn’t lock up money for my kids for 50 years or more. Help them buy their first property instead. They will appreciate it much more
Nicely timed article – been considering this for the kids for too long now. A hefty leg up for their uncertain future for minimal effort from me.
Limited options on brokers though – plus when adding say £100 per month the costs are maybe too high to take that approach. Maybe better £1200 at the start of each year. Would be interested in your suggestion for that.
I have some views on this I would like to share. I opened a junior sipp for 2 of my kids and put about £10k in each over a few years. The basic rate relief seemed like a good idea. Only later did it occur to me that I had very probably missed out on higher rate relief and, indeed on employer contributions, both of which may be available to my children when they are older.
In my view, by far the better view is to invest the same money the same way in a JISA. Personally, I agree with the 100% equities approach and invested all monies in the Vanguard FTSE Global All Cap Index Tracker. Your child can remain ignorant of the existence of the JISA for as long as it takes him/her to become responsible. Hopefully, he/she will develop into a higher rate taxpayer who can also take advantage of employer contributions etc. At that point, the sums that have been growing in an ISA can simply be transferred into a workplace pension or, if self-employed, a SIPP, and the reliefs available, instead of 20% when a child, might be 40% or 45% plus whatever can be obtained from the employer. The difference will be enormous. There is a risk that your child will find out about the JISA/ISA and access it, but at the same time, the availability of this investment may turn out to be a blessing, as a legitimate need might arise. In short, it is not preferable to lock it away when your child is 5 years old; it is likely to be much more advantageous to tae this step when they are 30 or 35 years old, when they might be in a higher tax bracket but lacking the disposable income (due ot buying homes, building families etc) to take advantage of it.
I went 100% global equity trackers for my son, daughter, niece and nephew in stakeholder pensions. In my ideal world this will be an educational tool on tax relief, investing and compounding with their own money that enables more wealth generation.
A pot of tax relieved compounded investments at £1 a week (£26 contribution for birthday and Christmas) until the age of 18 makes for a story I find interesting.
One day they will crack and show a glimmer of interest (it’s still a tough sell for 7-13 year olds) 🙂
Another option if you are risk averse – invest in the latest (furthest maturity) Target Retirement fund. For example, you can invest in TR fund 2065 now. Revisit 5 years later and move it to the latest fund then if thats more appropriate. Even if you forget to do this, it wont be a disaster.
As a couple we don’t earn enough to max both ISAs (usually cannot manage to max just one), therefore we use my wife’s ISA as a faux Junior ISA that we remain fully in control of when they turn 18. Depending on how they turn out we can either convert it to a SIPP for them, or it can be used to top up a house deposit or whatever. Importantly, it cannot be pi$$ed up the wall should financial education not stick through their teens!
If a higher allocation to Equities is good, why stop at 100%? As you identify, they can stomach the drawdowns. Why not 110% stocks, or 120%, or whatever? By adding a small allocation to a leveraged ETF like: XS2D.L or XLDX.L ? Unfortunately there’s no (appropriately) leveraged global tracker, so it’s a bit messy.
But do you believe in a positive equity risk premium in the long run, or not?
@Finumus — Leverage is fine in theory but in practice leveraged ETFs can produce horrid counter-intuitive results due to volatility and being settled daily.
Perhaps a geared-up investment trust that has recourse to long-term debt might be an option if you wanted to go down this route?
Are there any Junior SIPPs which you can just add £50 or so per month without getting whacked a tenner for trading fees?
Fidelity has the cheapest junior SIPP AFAIK (assuming you invest in Funds not etfs/shares)
LoneExchanger, I hold my kids’ pensions with youinvest, but I have stopped paying into them for the reasons I gave above. The costs are low to hold for an ETF. For buying shares in the etf, it is very expensive – £9.95, so you’d be better investing in a fund rather than an etf; I think the cost of adding is very cheap. if you go on their site they have a very transparent explanation of charges where you input what you would be adding and it tells you how much that would cost each year.
@Finumus @The Investor
I understand that extra manager/instrument costs and the effect of rebalancing make significant inroads into 2*S&P500 tracker returns so that it won’t be 2* in practice – but over the long run, assuming a decent growth in the index (which you have to be doing if you are investing in the index in the first place) are there any likely circumstances where the leveraged fund won’t overperform? Doing the maths or simulation is beyond my brainpower!
@The Investor
You are of course, right, volatility drag is a thing (both ways, but mostly badly), and the leveraged investment trust is a reasonable idea. Both the fees and the active management though?
@Student Grant
As TI points out, it’s highly path dependent, and x2 is actually too much leverage… but to take a sample of the last three years, which has seen a fair amount of the “oh-so-damaging” volatility:
x2 SP500 (XS2D) 3Y: +91.58%
x1 SP500 (SPXP) 3Y: +51.01%
It’s certainly not double, but it’s not bad.
Thanks @Finumus
A 10 or 20% allocation to a 2* over 40 y could make a considerable difference then once compounded (though I suppose would need periodic rebalancing within the SIPP). I suspect more problematic might be: finding a junior SIPP provider willing to sell it to you; and dealing costs on a small fraction of a (initially) small pot.
@Alex poole, I must disabuse you of the idea that you can keep a JISA secret from an adult child. Leaving aside legal and moral issues, its practically impossible too. At 18, you will cease to be able to operate the JISA (that’s the rules). The provider will contact the account owner (if they don’t have their contact details they will contact you) and the account can’t be operated until they have registered to do so with the provider. If you were determined to hide it, I guess you might be able to (you’d probably have to intercept post as well), but for sure, you would not be able to fund the JISA, make any transactions, or even view the account to check all is well.
In my own experience, it is not hard to talk to your children about money you’ve invested for them, and your expectations for it. My sons accept that the money is there for the long term, and they are happy to let me continue to oversee it (and add to it – but of course we have to do that together, as it needs to be money from their account).
Parents still have plenty of influence and can for example say – that’s the money to help with your living expenses at university, I won’t be giving any more, so use it wisely. But if for you, the risk of a really harmful scenario seems too great (the only one I can think of is a young person with an addiction) – then I suggest you don’t use a JISA. Keep the money in your name and gift it exactly when and how you think is appropriate. Better that than setting a pretty poor example of openness and honesty around money and relationships.
#10 @LoneExchanger I set up SIPPs for both my kids with A.J.Bell where the regular investment is ~£1.50 or you can let the cash & tax relief accumulate and then buy at 100/250/500 what ever your preference is.
One point on the global trackers however is the current concentration risk – Vanguard’s one as an example (VWRL – https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/portfolio-data) is 61.7% North America and within this 14.98% in the top 10 holdings (no prize for guessing how many of those are tech stocks). Not exactly the most diversified approach but obviously a good starting point.
@Student Grant – Actually – we’ve not had any trouble buying these sorts of instruments in Junior SIPPs (AJ Bell) or JISAs (x-o). You have to pass the “complex instruments” test – and when I was managing the account for them this wasn’t a problem. Interesting question if this still “works” – I’ve not rebalanced since they turned 18 – I must try it.
@ Vanguardfan, @ Alex Poole: I believe a JISA comes under the child’s/young adult’s control at the age of 16, although they can’t withdraw from it until they’re 18.
@Finumus
Yeah – I have the JISAs (just turned into ISAs) partly with Interactive Brokers, so can prob do it there although as you say now they have to pass the test not me. Also the ISAs are less definitively long term than SIPPs, so slightly more risk of using leverage. The idea (aided by your posts!) is to use the ISAs pro tem instead of paying University tuition fees up front, but: a) may need to cash in and pay off student loans if they start earning well after Uni; b) alternatively, use for house deposit; and c) gotta find some liquidity to keep up those tax free ISA sums each April 5th for the long term (for as long as ISAs continue to exist). With any luck a successful bank of mum and dad / grandparents may mean we can keeps all the ISAs AND pay off loans/provide house deposit – just then the moral/disincentivising risk of being over-provided by the parents to contend with.
@ Tyro
Was definitely 18 for my two kids before they could control the JISA, which was a stocks and shares ISA, but at 16 they can open and control a cash ISA (not sure about a cash JISA, though no good reason you’d want to have one of those).
So there is a very nice loophole in that they could open a cash ISA at 16 as well as the JISA until 18, so by timing it right we had a £29,000 total ISA allowance for each of them for three tax years.
@Finumus @Student Grant — Yes, path dependency is the key (i.e. You don’t know what you’ll get).
From the SEC’s bulletin about levered/inverse ETFs:
https://www.sec.gov/investor/pubs/leveragedetfs-alert
I would only look to hold levered or inverse ETFs for a day or two, personally. 🙂
Looking through the archives, I can’t find the post I thought I’d written giving a beginner’s guide type introduction to the issues with levered ETFs.
However here’s one on short ETFs, which again shows how the daily volatility can work against you:
https://monevator.com/short-etf-maths/
I’m not going to tell @Finumus to suck eggs on this stuff, he’s more than capable of holding his own! 🙂 But I would warn non-seasoned investors to be extremely wary with these products. Cheers!
Can’t help but think that the 2* leverage is mostly a problem medium term – short term (days) or long term (5 years/decades) it ought to work out most of the time if the index does well (which you are already banking on). I just put in XS2D against VUSA over 10 years and it ends up… double give or take (although plenty of drawdowns to near parity along the way). And there isn’t an option to take out a margin loan in a JISA/SIPP AFAIK so it’s the only way to leverage in that sort of account.
Also, and don’t tell him (and also I am not taking ANY advice from him) but I have a gut feeling that Finumus knows his sh*t…
@ All – great thread, really interesting to see the different approaches people take.
Anyone got any views about how you stimulate interest in the financial future for the young? Is it hopeless? Do you just have to wait until they’re ready?
@ Finumus – I think you just hit on an idea for your next post.
@ Alex – on the diversification point, if you haven’t seen it this classic post is good food for thought: https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/
@The Accumulator
“Anyone got any views about how you stimulate interest in the financial future for the young? Is it hopeless? Do you just have to wait until they’re ready?”
No. I’ve completely failed w/ mine. They seem to consider investing both nerdy and a bit non-woke, alarmingly.
My 9 and 7 yo old boys like their Hyperjar cards very much and they take a keen but fleeting interest in the Vanguard balances with their names on but otherwise it’s a struggle.
If Finumus has failed there’s no hope for the rest of us!?
@Vanguardfan, thanks for your post. However, I do think the risk is manageable. When I was younger, say between 18 and 25, my parents sometimes gave me pieces of paper to sign. I knew it was for my own good and I didnt look under the hood. At this time I look after about 7 LISAs, 7 ISAs and 2 pensions, and that’s just for adults. I also look after a bunch of dealing accounts for children (about 6) and 6 JISAs. I manage them from email addresses controlled by me, on behalf of family members, and every few years I have to update the debit card details. The only involvement from them is when they have to authenticate a payment from their mobile phone, so it really is trivial. If I was not continuing to pay into these accounts then the owners would never hear about them, ISA, LISA or SIPP. There are no letters, no paperwork etc.
In summary, the point I want to get across to other users is that making SIPP contributions for a child means the child loses out on employer contributions and also on higher rate relief. When/if my kids become higher rate taxpayers they, or a financial planner acting on their behalf, will use their ISA savings to fund pension contributions and they will receive twice as much tax relief (and then some, with the employer contributions if they are not self-employed). This is also a good way to get money out of my estate. Along the way, the benefit of using JISA/ISA for them is that the money is available to address the unknown unknowns that may crop up along the way.
I was an early investor (modestly!) in a startup called GoHenry, which creates personalized debit cards for children and has an associated app that enables you to set/see spending, setup an allowance, tie allowances to chores etc. It’s been very popular, though more personal finance than investing. But worth looking at if starting from nowhere.
Recently acquired by Acorns from the US, but should be business as usual going forward as far as I know.
“Anyone got any views about how you stimulate interest in the financial future for the young? Is it hopeless? Do you just have to wait until they’re ready?”
A few ideas I am trying below but I dont have teenagers yet….
Role model good financial behaviours and make them aware of what’s in it for them. Budgets, investments and purchase choices (including my old practical and unsexy car) mean benefits such as holidays, time with family and adventures.
Linking any emotion to what you want them to learn helps. Get them involved in decisions for planning adventures and holidays. If you can link emotion to good behaviours, it will make it more memorable when they do come to draw on that knowledge in the future.
I like to imagine as adults evey time they hear the word pension they’ll nostalgically remember opening post in their name every year from 2 years old with yellow Aviva pension statements, albeit the emotion linked is likely to be disappointment the post wasnt more interesting.
This yearly reminder will be filed away in their heads alongside the concept that they own part of thousands of businesses. Businesses bought for them by me and the prime minister. When Sainsburys make money, they do too. They’ll draw on that to make their own choices.
You can teach them how to fish. You cant make them fish.
The penny finally dropped with my (step) daughter when she became a homeowner, and took on responsibility for her family’s finances. She’s doing a great job and, since her mother is not at all inclined in that direction, I have a secret smile at the triumph of nurture over nature whenever she talks to me about money!
Judging by Finumus’ and Martin T’s experience, maybe reverse psychology is a viable tactic? Role model being completely hopeless with money in order to foster childhood rebellion in the opposite direction!
@Alex Poole – Useful to have your input, thank you. I don’t disagree at all with prioritising the JISA or a parent’s ISA in some indirect manner. However, regarding the comment that contributing to a JSIPP will lose the child higher rate relief and employer contributions, please explain as I don’t understand. What have I missed? I can see it could be the LTA, or some unknown future socialist capping of pension pots (a lot of rules can change in 30 or so years). Is that what you are getting at?
@Always Late. What I mean is this:
1. Right now, I can deposit £2,880 into:
(a) a JSIPP, and the govt will increase that by basic rate relief at 25% to £3,600. My child can access it on turning 57.
(b) a JISA, and the govt will not increase it at all. My child can access it on turning 18 (unless I conceal its existence, which is what I will do).
2. If I pick option 1 (b) and my child goes on to earn, say, £57,600 p.a., then he can take that £2,880 and use it to contribute to a workplace pension. That sum is exactly 5% of his salary. His employer then adds 3% (£1,728) and the govt gives higher rate relief of 40% (£1,920). Thus, at a cost to him of £2,880, he can put £6,528 into his pension.
In other words, he gets the benefit of employer contributions by waiting until he has an employer, and higher rate tax relief assuming he goes on to be a 40% tax payer. Now, to anyone reading this, I am aware that I have struggled with expressing the maths here. I used an online workplace pension calculator to help me, but I am actually self-employed so workplace pensions confuse me terribly. However, I think tha actual final figures are right.
@ Alexpoole thank you for this. The only omission is the upfront contribution of 25% and the compound effect of that if invested early in the math