If you’re a parent, supporting your adult children is likely to be an important part of your financial plan. Indeed, a report from Royal London found that 55% of financial advisers say their clients are more concerned about their family’s finances than their own.
That’s because the rising cost of living is causing financial difficulty for many people, and it is only natural to want to support your children or grandchildren.
Fortunately, there are many ways you can do this, but have you considered contributing to their pension?
People often overlook this option, but you may want to consider it because it could benefit you both. That’s because it is an effective way to ensure that their future is secure, and it could also be a tax-efficient way to pass down wealth.
Read on to learn more about contributing to your child or grandchild’s pension and what the potential benefits are.
Your child or grandchild could benefit from valuable pension contributions
As PensionsAge reports, more than a quarter of large companies have seen an increase in pension contribution opt-outs. This is likely because people want to save money as living costs rise.
However, they could be missing out on valuable opportunities to grow their retirement savings, which is why it may be more important than ever to help your child or grandchild keep up with their pension contributions.
You can do this by making third-party contributions to your child or grandchild’s pension, and they will benefit from valuable tax relief. That’s because contributions are treated as if the recipient had made them, so they receive 20% tax relief at source.
Additionally, if they are a higher- or additional-rate taxpayer, they can claim more relief through self-assessment.
Any contributions you make will count towards their Annual Allowance of £60,000 – or £3,600 if they are not earning – and you can pay as much as you like into their pension without triggering a tax charge, provided the total contributions, including employer contributions, do not exceed this amount.
You can help them benefit from valuable compound returns
You could give your child or grandchild a cash gift to help them meet short-term goals, but they may see more long-term benefits if you contribute to their pension instead.
That’s because they will get compound returns on these contributions. So, when they eventually come to draw their pension, they may well receive more than they would if you gave them a cash gift or they inherited the wealth after you die.
A study from Standard Life perfectly illustrates the power of these compound returns. In the example below, the estimated growth is based on an annual wage of £23,000 with 3% pension contributions, and assuming 3% wage growth each year. You can see that the earlier the contributions begin, the bigger impact compounding has.
Source: Standard Life
As you can see, investing in a pension earlier in life may result in a much bigger fund during retirement. That’s why helping your child or grandchild keep up with their contributions could be a better way to support them.
However, they cannot access this money until they are at least 55 years old (rising to 57 in 2028) so it is not useful for short-term goals like university funding, getting on the property ladder, or paying for general living costs.
So, if they need help with immediate costs, you may want to consider other options like a cash gift instead.
You may be able to reduce the value of your estate for Inheritance Tax purposes
Mitigating Inheritance Tax (IHT) may be an important part of your financial plan, and making pension contributions to a child or grandchild could help you do that.
That’s because paying money into their pension can reduce the overall value of your estate for IHT purposes.
However, you are subject to gifting rules, so there may be limits on the amount that you can contribute without incurring a tax charge.
Normally, you can gift up to £3,000 a year using your annual exemption. You can also make larger gifts that will fall outside the value of your estate provided you survive for seven years after giving the gift.
Additionally, regular pension contributions may come under the “gifts from income” rules.
Gifts from income may fall outside of your estate for IHT purposes and there is not a limit on how much you can give. But they must meet specific criteria to qualify:
- The gift must be regular.
- It must come from your income, not other sources such as your savings.
- You must be able to afford the gift without making sacrifices to your normal lifestyle.
While gifts from income can be an effective way to make regular contributions to your child or grandchild’s pension, the rules can be complicated. That’s why it may be a good idea to seek advice first, to make sure that the contributions are tax-efficient.
Get in touch
If you are concerned about your family’s finances and would like to explore ways to support them, we can advise you.
Please contact us on hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
