How making third-party contributions to a loved one’s pension could benefit you both

Throughout your working life, you’ll pay into your pension each month to build savings for your retirement. But you might not realise that you can pay into other people’s pensions too.

You’re able to make third-party contributions to a loved one’s retirement savings, and this may be more valuable than a simple cash gift. What’s more, paying into someone else’s pension could help you manage the tax liability of your estate.

Read on to learn how contributing to a loved one’s pension could benefit you both.

Pension investment growth could help your loved ones achieve a more comfortable retirement

According to the UK government, 43% of working-age people are undersaving for retirement. If your children or grandchildren fall into this group, they may struggle to achieve a comfortable quality of life in their later years.

Contributing to their pension could help them make up a shortfall in their savings, meaning they are more likely to enjoy their dream retirement.

You can start a pension for a young child or contribute to an adult child’s pension, and any wealth you pay in will be invested and could grow over time.

The returns they see could make a significant difference to the size of their retirement pot and research shows that the earlier you start contributing, the better.

Figures from Nest compared two savers, each putting aside £200 a month for 10 years, meaning they both contribute £24,000 in total. Both achieved 5% investment growth every year until age 60.

The only difference between the two is that Person A started contributing at 22, while Person B didn’t start paying in until they were 32.

At age 60:

Person A would have £125,000
Person B would have £77,000.

Despite both paying in the same amount, Person A has a much larger pension pot because they benefitted from investment growth for longer.

That’s why paying into a loved one’s pension is an excellent way to support them financially, regardless of how old they are.

This is especially true if cost of living pressures mean they are finding it difficult to contribute enough to their retirement savings.

Alternatively, if your partner takes a career break to care for children, train in a new career, or pursue personal goals, they might miss out on valuable contributions while they are out of work.

By making third-party contributions, you ensure your loved ones build their savings earlier in life and generate growth for longer. As you can see from the figures above, this could significantly increase the size of their retirement pot.

Your loved ones will benefit from tax relief on the contributions

When you pay into someone else’s pension, the contributions are treated as if that person had made them.

This means they benefit from tax relief as they normally would.

They’ll receive 20% tax relief automatically and, if they’re a higher- or additional-rate taxpayer, they can claim another 20% or 25% through self-assessment.

As a result, payments into their pension might help a loved one grow their savings faster than a simple cash gift would.

However, they only benefit from tax relief on contributions up to their “Annual Allowance”.

In 2025/26 an employed person has an Annual Allowance of £60,000 (or 100% of their earnings, whichever is lower) each year. This includes their own contributions, employer contributions, any payments you make, and all tax relief they benefit from.

Meanwhile, children and non-earners have an Annual Allowance of just £3,600 a year.

If you’re contributing to a loved one’s pension, it’s important to consider their Annual Allowance. If they exceed the allowance, you may want to explore alternative ways to pass wealth to them.

Passing wealth to your loved ones now could reduce the Inheritance Tax they pay later

After recent announcements regarding Inheritance Tax (IHT) and pensions, you might be especially concerned about the tax your loved ones could pay on your estate when you’re gone.

Fortunately, any third-party pension contributions you make may be considered gifts and could help you reduce the size of your estate for IHT purposes.

The “gifting annual exemption” and “potentially exempt transfers”

In 2025/26, you have a “gifting annual exemption” of £3,000 and any gifts up to this amount automatically fall outside your estate.

Any further gifts are “potentially exempt transfers” (PETs) and might be exempt from IHT provided you survive for seven years after transferring the funds.

If you do pass away within seven years, there may be some IHT to pay. This is calculated on a sliding scale known as “taper relief”.

These gifting rules will likely apply if you make irregular payments to a loved one’s pension.

The “gifts from surplus income” rule

If you make regular payments to a loved one’s pension, you might benefit from the “gifts from surplus income” rule. This exemption allows you to make unlimited IHT-free transfers to a beneficiary, without the need to wait for seven years before they fall outside your estate.

However, the payments must meet certain criteria:

The payments must be regular (monthly or weekly, for example).
You must draw the funds from your regular income, not your savings or other sources.
Making the payments must not affect your standard of living.

So, if you were to contribute to a loved one’s pension each month, you might qualify for this exemption, helping you mitigate IHT.

That said, the executor of your will must be able to prove that the contributions meet the above criteria, so you’ll need clear records of all payments.

We can help you navigate the IHT gifting rules and gather the necessary paperwork to ensure you’re being as tax-efficient as possible when paying into a loved one’s pension.

Get in touch

We can help you manage third-party pension contributions and avoid the potential pitfalls.

Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

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

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

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

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.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.