ISA or SIPP for my son?

[Amaryllis]

My son is resident in the UK but spends long periods, usually around 10 months a year, working as an English language teacher abroad. His contracts are generally short-term or non-existent/casual, and as far as I know he doesn't pay tax in these countries.
 
Except for a few years employment in the UK and a brief period when he was on Jobseekers/UC, he has not accrued any National Insurance credits. (His earnings are generally below the HMRC allowance of £12,500, so he doesn't pay tax.)

I worry about his future retirement and would like to invest some money (around £500 a month) for him. I am wondering whether ISAs or a SIPP would be better. Would he even be eligible for a SIPP?

Would the money have to come from a bank account in his name, or could I set up a direct debit from my own account?

[dmukgr]

Whilst I'm not answering your a or b question and generally I am someone who you shouldn't take advice from, I wonder if paying for the NI gaps would be a better investment (if possible, that is something else I don't know).

Of course, depending on his age it could be a reaaaallly long wait until it starts paying out and you have to trust that a state pension will still exist in the future, but I thought I should mention in.

[Amaryllis]

Thank you,dmukgr, I'll certainly look into this and I hope this will be possible, given that he spends most of his time working abroad. However, given that the state pension is woefully inadequate even now, I'd still want to invest additional funds on his behalf.

[JohnB]

You could also consider a LISA rather than an ISA if the money might be useful as a house deposit

[Amaryllis]

Thanks, JohnB - I wasn't even aware of LISA...

Would he be able to contribute to a LISA and an ordinary ISA in the same tax year?

[uspaul666]

You could also consider a LISA rather than an ISA if the money might be useful as a house deposit

This might be good advice in some parts of the country but isn’t in London. There is a maximum house price £450k that applies when you buy a house with a LiSA and no account is made if you buy a house with a partner or as shared ownership. As such, the LISA my daughter bought with a view to helping out with a flat or house purchase is now destined for retirement only.
Not saying it’s a terrible idea, just something to be aware of.

[Amaryllis]

Yes, uspaul666, I would be planning for him to withdraw the LISA funds after the age of 60. From the gov website:

You can take your savings out of a Lifetime ISA when you’re 60 or over.
You’ll pay a 25% charge if you withdraw money or transfer the Lifetime ISA to another type of ISA before 60.
If you die your Lifetime ISA ends on the date of your death. There’s no charge to withdraw the funds or assets from your account.
A Lifetime ISA is one of a number of ways to save for later life.

I cannot see any drawback...?

[TUK020]

I worry about his future retirement and would like to invest some money (around £500 a month) for him. I am wondering whether ISAs or a SIPP would be better. Would he even be eligible for a SIPP?

I am guessing that he has 30+ years before retirement.
He may have lots of other priorities to deal before he gets there.
Getting married. Starting a family. Buying a house. Starting a business. Etc??
The problem with LISAs for retirement & SIPPs is that he may have more urgent needs than that.
ISA stays more flexible for the unknowns that will unfold in his life

[Amaryllis]

Thank you, TUKO20. I am leaning towards paying his voluntary NI contributions and funding both an ISA (say £300 a month) and a LISA (~ £200 a month).

Would the money have to come from a bank account in his name, or could I set up direct debits from my own account?

Thanks everyone - I appreciate your help!

[kempiejon]

A lot can happen over a lifetime and there may be lots of obstacles to overcome.
A SIPP is useful in that it's specifically for retirement. Handy that it doesn't affect benefits, won't be confiscated if they're bankrupted, falls out of scope for inheritance and for those with discipline issues can't be accessed early, of course that is one of their shortfalls too.

[Amaryllis]

These are all good points, kempiejon. I think I may help him start a SIPP in a year or two, partly because I think it's probably less straightforward to set up than a (L)ISA...

[TwmSionCati]

My son is resident in the UK but spends long periods, usually around 10 months a year, working ... abroad.

I’ld be careful to establish whether he’s UK resident for tax purposes [http://www.gov.uk/tax-foreign-income/residence]

Re ISA/LISA: “To be eligible to subscribe... an investor must be an individual ... resident in the UK ... an individual who is not resident cannot make payments to an account ... Investors who are unsure of their residence status should refer to the RDR3: Statutory Residence Test. [http://www.gov.uk/guidance/who-can-invest-in-an-isa-if-youre-an-isa-manager]

Re SIPP: “... to obtain tax relief on personal contributions to a registered scheme, a member must be a relevant UK individual. [PTM025400]
“An individual is a relevant UK individual for a tax year if they:
— have relevant UK earnings chargeable to income tax for that tax year,
— are resident in the United Kingdom at some time during that tax year,
— were resident in the UK at some time during the five tax years immediately before the tax year in question and they were also resident in the UK when they joined the pension scheme, ...” [PTM044100]

... could I set up a direct debit from my own account?

Yes.

TSC

[Dod101]

My son is resident in the UK but spends long periods, usually around 10 months a year, working ... abroad.

I’ld be careful to establish whether he’s UK resident for tax purposes [http://www.gov.uk/tax-foreign-income/residence]

Re ISA/LISA: “To be eligible to subscribe... an investor must be an individual ... resident in the UK ... an individual who is not resident cannot make payments to an account ... Investors who are unsure of their residence status should refer to the RDR3: Statutory Residence Test. [http://www.gov.uk/guidance/who-can-invest-in-an-isa-if-youre-an-isa-manager]

Re SIPP: “... to obtain tax relief on personal contributions to a registered scheme, a member must be a relevant UK individual. [PTM025400]
“An individual is a relevant UK individual for a tax year if they:
— have relevant UK earnings chargeable to income tax for that tax year,
— are resident in the United Kingdom at some time during that tax year,
— were resident in the UK at some time during the five tax years immediately before the tax year in question and they were also resident in the UK when they joined the pension scheme, ...” [PTM044100]

... could I set up a direct debit from my own account?

Yes.

TSC

Quite ironic really because most people working overseas are doing their best to avoid being counted as resident in the UK for tax purposes (because of course if he is he will have to declare all his foreign earnings to HMRC) but if he is not resident for tax purposes he cannot have an ISA or a SIPP. Not sure what the deal is re National Insurance but presumably if he is resident for tax he will be paying these contributions anyway. If not, I think he can just pay Class 3 contributions to preserve his State pension rights.

Dod

[Amaryllis]

Thanks, twmSionCati and Dod101.

It looks like my son would not be considered a UK resident for the current tax year as he doesn't meet the 'ties test'.

It seems, therefore, that paying his Class 3 NI contributions and/or taking out an ordinary unit trust are the only options open to me.

Unless one of you helpful people have any other ideas?

Thanks everyone!