For those parents who maybe have 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.
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.
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 of course, 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.
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:
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 circumstances – which in many cases will be up to their annual salary or £40,000, whichever is the lower.
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 firstname.lastname@example.org or call 0808 144 5575 to speak with one of our financial planning consultants near you.