Pensions benefits you may have missed – Parents are able to pay into their adult children’s pensions
Every parent would like long-term financial security for their children.
While that can never be guaranteed there is something you can do to help but may not be aware of it.
How about boosting their savings, potentially increasing their tax relief and, for some, reducing the amount of child benefit they lose?
You can do all that by simply paying into your adult child’s pension.
The key factor here is that contributions by a parent are treated as being made the child. That means he or she will get tax relief on the contribution and, at the higher rate if they are eligible.
The contribution is also deducted from your child’s income before any high-income child benefit charge is calculated – potential reducing the tax charge.
What does all this mean in reality?
An £800 contribution would be eligible for basic rate tax relief, increasing the amount paid into the pot to £1,000. Using an annual tax return, the child could claim higher rate relief on their parent’s contribution if they were a higher rate taxpayer.
Families with one person earning more than £50,000 per annum face a child benefit penalty. One per cent of their child benefit is deducted for every £100 earned above the £50,000 threshold.
But a pension contribution reducing the child’s net income for child benefit calculations could reduce the tax charge and if falls below the £50,000 threshold, remove the penalty altogether.
John Dowding, Technical Director, Morgan Lloyd, adds: “The long period between paying a contribution for your child and their retirement really illustrates the power of compound interest. Or as Einstein called it – the 8th wonder of the world!
The maximum tax relievable contribution that can be paid for your child is £3,600pa. The basic rate tax relief will mean that the actual payment reduces to £2,880. And if you’re a higher rate taxpayer, you’ll also get back another £720 in tax relief.
So what does Einstein’s remarkable claim about compound interest mean? Well if you were to pay just one single contribution of £3,600 on the birth of your new-born and it is then left until their 67th birthday, the wonder of compound interest really does work its magic.
Over the past 100 years, the FTSE All-Share average annual return has been 7.0%. So if we assume this average rate for the next 67 years, the one off contribution of £3,600 will grow to a staggering… wait for it… £335,000!
This clearly shows the huge benefit of starting pension provision early and how this can secure the long-term financial security for your children. And it certainly justifies Einstein’s adoration for this great mathematical phenomenon!”
The information above is based on our understanding of the legislation applicable to UK Registered Pension Schemes, and HM Revenue & Customs rules. It is provided as a summary only and should not be taken as advice - Morgan Lloyd SIPP Services Ltd and Morgan Lloyd Administration Ltd are not authorised to give financial advice and will not be responsible for any decision or action taken as a result of relying on this information. If you are a retail client you should seek financial advice from a financial adviser who is authorised by the Financial Conduct Authority and/or seek guidance from the Government’s Pension Wise service.