Junior SIPP - Should you set up a pension for your toddler?

I've started a pension for Violet. This may seem crazy - she is only two and a half, and we are short of cash due to the crazy cost of the nursery and the fancy new flat. But I have been meaning to do it for ages, and finally, setting it up has made me happy...but poorer.

I wanted to do it for several reasons, outlined below, and why I think it might be a good idea for many people.

The basics - why start a pension for a 2-year-old!

Having mentioned my plan to some friends and family, I was surprised to discover how few people knew you can start a pension for a baby or, in fact, any child under 18.

People seem to know about Junior ISAs but not the Junior SIPPs. This is odd as it can be a brilliant (and very tax-efficient) way to save for your child's future and give them something really valuable in the future...albeit a long way in the future as they won't be able to access the money till they are 57.

But my thinking is that for a relatively small sacrifice now, I can potentially remove the need for Violet to save massively for her own pension. Since the pension pot can build up over her early lifetime, rather than when she starts work...or worrying about pensions at 40 like most of us. Although she may not be hugely grateful at 18, when she gets to control, it will mean that the pension pot could be quite significant when she needs it without the huge effort or sacrifice that most of us make

You can open a Junior Self Invested Personal Pension (SIPP) for a child under 18, but the younger, the better; unfortunately, we didn't have the cash till now. You can pay a maximum of £2,880 per year into the pension, which becomes £3,600 through 20 per cent tax relief, which is just brilliant. But of course, you can't get it out.

So all being well, and assuming there is some growth left in the stock market, your child gets the benefit of tax relief and compound interest.

So, for example, if you can start as soon as a baby is born and pay in the maximum assuming a four per cent growth, and that your child doesn't continue to pay after they are 18 they will still have a pension pot of £620,000 at 67. This, of course, doesn't include any contributions they make themselves when they are working or state pension.

In my case, I have started a bit late as Violet will be three in April. I am using Fidelity to manage the pension. I read around the subject, and they seem well regarded, and the fees are low for managing the pension. There are also fees for individual funds, and these vary. The process of setting up was extremely straightforward and all done online.

I have also only been able to invest £1000 so far. If possible, I will try and invest at least another £500 before the end of the tax year in April. My plan is to try and max it out every year. This will become easier when she goes to school.

To make up for the late start, I've decided to be bolder in the choice of investments. I have gone all in on the Fidelity Global Technology Fund. That may sound mad, especially after being so sensible, but this isn't a pension for a 45-year-old, and in the long run, technology has got to be a good bet (hopefully) so I have taken a bit of a punt. Violet, of course, can reallocate later as she gets older and wants a more secure or low-risk portfolio.

Why it's right for me, and I hope Violet.

Or why I hope it will give her a comfortable life without making her an entitled brat.

I am an old dad and getting more and more conscious I won't be around for a huge chunk of her life, and I want to make sure she has a happy and comfortable life.

A pension isn't the only way we are hoping to give Violet a good start financially. The most obvious is that we are sending her to a very good (and hugely expensive) nursery, we have also moved to an area with good schools and we are saving for a college fund.

I hope that her knowing she has a decent pension plan in place already will provide security without making her spoiled, she will still need to get a job and work. But hopefully, doing something she loves. Knowing there is a pension may take away some pressure. On a more basic level, it will allow her to spend income on other things, like a flat.

So why a pension, not a Junior ISA or a trust fund. Trust funds are out, simply because we aren't talking about that level of money.

Junior ISAs are good, in that they are tax efficient and provide good exposure to the stock market. But there is a practical problem. The child gets control of the money at 18. Now we all hope our child will be a well-rounded and mature person. But what if they aren't? It might just be as annoying as your silly 18-year-old kid spending 20 years of savings on a holiday rather than a deposit, but it could be far worse if they are going through a bad stage at that point. So my preferred route is SIPP for her and then save in our own ISAs and provide an allowance later.

One final thing. The contribution shouldn't replace other necessary forms of investment. I need to sort out some life insurance, another exciting post to follow...Chris buys life insurance, I am sure that will go viral.