By Kerry Chaloner
21st February 2021
Subscribe
For those parents who maybehave some spare funds, putting money into their children’s pension will boost the retirement prospects of their offspring. Under current rules, there is also nothing to stop a parent making a contribution into the pension of an adult child. With millions of younger workers having been newly enrolled into a workplace pension, many now have a pension for the first time but many are only making very modest contributions, so a further boost by way of additional contributions can prove very beneficial.
Building a more meaningful retirement pot
An additional contribution from parents early in their working life, benefiting from compound interest as it grows, could help your loved ones to build a more meaningful retirement pot and is money that cannot be touched until later in life.
A campaign was launched in 2019 by one of the pension providers, Royal London to make parents aware of the ‘hidden advantages’ of paying into the pension pot of their adult children. It is a little known fact that a parent who puts money into their child’s pension could be doing them a favour three times over.
Improving long-term financial security
Firstly, the recipient will get a boost to their retirement pot, including tax relief at the basic rate. Secondly, recipients who are higher rate taxpayers can claim higher rate tax relief on their parents’ contributions, which will thereby increase their disposable income. And thirdly, recipients affected by the high income child benefit charge can see this penalty reduced because of their parents’ generosity.
Of course not every parent has spare cash to pay in to their children’s pensions, but many may be in a better financial position than their children as clearly they are at a different stage of life. By paying in to their children’s pension, they can therefore give them a triple boost and improve their long-term financial security. Further information around this is provided below.
Recipient receives basic rate tax relief
A little-known feature of the pensions system, however, is that the contribution by the parent is treated as if it had been made by the recipient. So, for example, if a parent pays £800 into their child’s personal pension, the recipient will get basic rate tax relief on the contribution, taking the amount in the pot immediately up to £1,000.
In addition, there are two further benefits to the recipient:
- If the recipient is a higher-rate taxpayer, he or she can claim higher rate relief on the contribution made by the parent; this would be done through the annual tax return process and would reduce the tax bill of the recipient.
- If the recipient is affected by the ‘high income child benefit charge’ and is earning in the £50,000-£60,000 bracket or slightly above, the money contributed by the parent is deducted from their income before the high income child benefit charge is worked out, thereby reducing their tax charge; for example, if the recipient is earning £60,000 and therefore faces a child benefit tax charge of 100% of their child benefit amount, a pension contribution by the parent of £8,000 grossed up to £10,000 by tax relief would reduce the recipient’s income to £50,000 for purposes of the child benefit charge and would therefore completely eliminate the tax charge, under current legislation.
Reducing a future inheritance tax bill
Apart from generally wanting to help their children, parents may also be interested in this idea particularly because they may be up against their own annual limits for pension contributions and may therefore have spare cash. Contributions may also reduce future inheritance tax bills if they qualify for one of the standard exemptions, such as regular gifts made from regular income.
The amount that the parent can contribute with the benefit of pension tax relief is not limited by the parent’s pension tax relief limit but by the limit of their children based on their circ*mstances – which in many cases will be up to their annual salary or £40,000, whichever is the lower.
Collective wealth to support each other
Intergenerational financial planning is about how families use their collective wealth to support each other during their lifetimes.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We are Chartered Independent Financial Advisers. If you are a parent or guardian and would like some advice on saving and investment options for your children or grandchildren, please contact us at help@armstrongwatson.co.uk or call 0808 144 5575 to speak with one of our financial planning consultants near you.
FAQs
If the recipient is a higher-rate taxpayer, he or she can claim higher rate relief on the contribution made by the parent; this would be done through the annual tax return process and would reduce the tax bill of the recipient.
What is a pension for kids? ›
A child's pension is a pension set up by a parent or legal guardian for a child under the age of 18. Importantly, a children's pension shares many similarities with adult pensions, including attracting pension tax relief and the rules surrounding how to eventually access these pension savings.
What is MPAA? ›
What is the MPAA? The MPAA (money purchase annual allowance) was introduced with pension freedoms and this limits the amount of money which can be contributed to a money purchase scheme once pensions have been flexibly accessed before a tax charge is payable.
Can you give your pension to your child? ›
Who gets a deceased's pension is determined by the pension contract and the details in each specific contract. Some pension contracts may stipulate that the pension ceases when the participant passes while others may allow for the pension to be distributed to a surviving spouse or dependent, such as a child.
What is the best age to start a pension? ›
It's best to start saving into a pension as early as you can, to maximise your retirement fund. Someone who starts in their 20s will have to put aside a much smaller proportion of their earnings to build the same pot as someone who starts saving in their 40s.
Is a pension better than a 401k? ›
There are pros and cons to both plans, but pensions are generally considered better than 401(k)s because they guarantee an income for life. A 401(k) can be more aggressively managed by the individual, which could create more growth than is likely from a pension fund.
What is the child benefit for Unjspf? ›
A child's benefit is derived from the benefit payable to the participant. The annual amount of the child's benefit is one-third of the participant's benefit, subject to a minimum amount estimated at US$ 2,202.84 per year and to a maximum amount of US$ 4,380.96 per year as of 1 April 2023.
How does Ufpls work? ›
With an UFPLS, usually 25% of each withdrawal will be tax free (up to a maximum of £268,275) and the rest taxed as income. Anything you don't withdraw stays invested as you choose. For example, if you had a £100,000 pension and made a £20,000 UFPLS withdrawal, usually £5,000 of that withdrawal would be tax free.
What is meant by scheme pension? ›
It is a pension paid from a scheme either directly or by way of an annuity.
What is a money purchase scheme? ›
A money purchase scheme (also known as defined contribution) is a scheme where the final value depends on: the amount of contributions made by the member, their employer and any third party. the performance of the investments underlying the scheme. the charges within the plan.
That depends. Some pensions end at death, meaning that no beneficiary or family member gets to claim the pension. But other pensions provide for payments to a surviving spouse or dependent children—for a few years for some, and longer for others.
Does a wife get a husband's pension if he dies? ›
What is a survivor's benefit/widow's pension? The federal pension law, the Employee Retirement Income Security Act (ERISA), requires private pension plans to provide a pension to a worker's surviving spouse if the employee earned a benefit.
Should I leave my pension to my child? ›
In addition to the potential tax liability, one of the disadvantages of naming a minor child as the beneficiary of your account is that when they reach the age of majority (which could be as young as eighteen in your state), they will gain complete control of the funds and could choose to pull everything out of the ...
How long will $750,000 last in retirement? ›
Under the 4% method, investment advisors suggest that you plan on drawing down 4% of your retirement account each year. With a $750,000 portfolio, that would give you $30,000 per year in income. At that rate of withdrawal, your portfolio would last 25 years before hitting zero.
Why retiring at 62 is a good idea? ›
You Have the Chance to Enjoy it Longer
Retiring early gives you more time to live the retirement life you've always dreamed of, be that pursuing hobbies, seeing the world, spending time with grandkids, or absolutely anything else you want.
How to retire at 62 with little money? ›
If you retire with no money, you'll have to consider ways to create income to pay your living expenses. That might include applying for Social Security retirement benefits, getting a reverse mortgage if you own a home, or starting a side hustle or part-time job to generate a steady paycheck.
What is a pension simple? ›
A pension plan is an employer sponsored retirement plan that gives employees a leg up on retirement planning. Unlike other more common retirement plans, they're sometimes funded primarily by employers and guarantee employees a certain level of income during retirement.
How does a pension work? ›
A pension plan is a type of retirement plan where employers promise to pay a defined benefit to employees for life after they retire. It's different from a defined contribution plan, like a 401(k), where employees put their own money in an employer-sponsored investment program.
What is pension simplified? ›
How does the Simplified Method work? The total of the previously taxed contributions in your account is divided by a set number of monthly payments based on your age (and/or the age of your option beneficiary, if applicable) at the time of retirement.
How do pensions pay out? ›
You can: take a pension annuity and receiving a monthly check; or, if your employer allows, take a lump-sum distribution, which you will need to invest and manage: lump sums can be rolled into an IRA, where you are taxed only on money you decide to take out.
