Got an Inheritance Tax problem? Your child’s pension could be the answer

The rules governing how we pass wealth to the next generation are shifting dramatically. As we explored last month, the government’s upcoming legislative changes mean that from April 2027, unused pensions will be included in the value of your estate for Inheritance Tax (IHT) purposes. 

As they were previously exempt, thousands of families could become liable for a 40% bill on their accumulated retirement pots. 

With the 2027 deadline approaching, you may be looking for alternative, tax-efficient ways to reduce the taxable value of your estate. One strategy is gifting wealth directly into your child or grandchild’s pension, specifically a Junior Self-Invested Personal Pension (SIPP). 

While a Junior SIPP could be a powerful tool for mitigating future tax bills and building a tax-efficient fund for your loved ones, it also means locking that money away for decades. 

That’s why it’s important to weigh up the pros and cons of implementing a multigenerational gifting plan before taking action.

A Junior SIPP could be a powerful Inheritance Tax tool 

Gifting money has long been a useful way of managing an IHT bill, and putting money into a child’s pension is no exception. 

There are three primary benefits to this: 

• Gifting money using annual exemptions can help lower an IHT bill. 
• The government provides a 20% top-up under basic-rate tax relief rules.
• The money invested has a long time to compound and grow.

Note: The maximum you can contribute to a Junior SIPP is £2,880 each tax year.

As of the 2026/27 tax year, you can gift up to £3,000 each year without incurring a potential IHT bill (this is known as the annual exemption). You can also make regular contributions out of your surplus monthly income, as long as it does not alter your standard of living. 

Consider what could happen if you made this contribution just once or chose to fund the SIPP throughout their childhood. The following calculations are based on information from Unbiased.

• The single gift: If you pay the maximum £2,880 into a Junior SIPP just once at birth, the government will top it up to £3,600 as pension tax relief. Assuming the money grows at an average annual rate of 5%, by the time the child reaches the age of 57, that single gift could be worth more than £58,000. 
• The long-term funding: If you choose to maximise that £2,880 contribution every year until they turn 18, the pot could grow to £109,940. As the fund will remain locked until retirement, it will continue to grow and could be worth £737,120 by the time they reach 57. 

By using this approach, you can help your child or grandchild save for their retirement before they have even stepped into the working world. 

The Office for National Statistics notes that the average private pension pot for UK adults aged 25-34 is just £18,800, so this head start could be significant. 

Regular monthly gifting could help even more

Opting for a regular contribution out of your surplus income could be easier on your monthly cash flow than giving a lump sum of nearly £3,000 all at once. 

Because gifts made from your surplus monthly income are exempt from IHT, you could budget a regular monthly transfer to a Junior SIPP for multiple children or grandchildren. Since the funds are drawn regularly from your surplus income, all pension pots are shielded from future IHT, and you could still retain your full £3,000 annual exemption for use elsewhere.

There are some downsides and realities to consider 

Despite the maths, which is inarguably compelling, a Junior SIPP can be a highly restrictive financial wrapper that comes with specific risks.

Unlike a Junior ISA, which a child can access at age 18, the beneficiary cannot access their Junior SIPP until they reach minimum pension age. 

As of 2026, this is 55, but it is set to rise to 57 in 2028. It is also likely to climb higher in the future as life expectancies change. This is money they cannot use to fund university tuition, a wedding, or a deposit on their first home. 

Moreover, when the child turns 18, legal ownership of the Junior SIPP automatically transfers to them. While they cannot withdraw the cash, they gain total control over how the money is invested. 

Create your multigenerational wealth plan by working with a financial planner

Mitigating an IHT problem requires balancing your own financial needs with your family’s future security. A significant mistake you could make here is over-gifting to avoid a future tax bill for your family. While ideal in principle, it could leave you short of capital during your own retirement years. 

A financial planner can construct a detailed lifetime cash flow model for you, which has several advantages. This stress-tests your finances against: 

• Inflation
• Long-term care costs
• Market downturns

By modelling your future cash flow, you can ensure that you draw any gifts to family purely from surplus wealth. 

Get in touch 

Estate planning is not a one-size-fits-all calculation, particularly when you’re looking at a multigenerational plan. By looking at this long view, you could find creative ways to minimise your tax liabilities while providing your children or grandchildren with a stable financial foundation. 

We can help with that.

Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about what we can do for you. 

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The Financial Conduct Authority does not regulate estate planning.