Why parents should consider topping up their children’s pension
Insurer Royal London is hoping to raise awareness among parents about the potential benefits of paying into the pension pot of an adult child.
Under the current rules, it is possible for a parent to make a contribution to their child’s pension. Any payments that are made during the child’s early working life are likely to be beneficial over the long-term, as they can benefit from compound interest and ultimately build a bigger retirement pot.
Making these contributions is a good way for parents to put spare cash to work to help their children, particularly if the parent has reached their own annual limits for pension contributions. The annual limit for contributions will be decided by the child’s pension tax relief limit not the parent’s, so in many cases it will be up to £40,000.
What’s more, the contribution by the parent is treated as if it has been made by the recipient. If the child is a basic rate taxpayer, an £800 payment into a personal pension will attract tax relief – bringing the amount paid into the pot up to £1,000. Likewise, if the recipient is a higher rate taxpayer they will receive higher rate tax relief on the contribution after completing their tax return.
The third important advantage to consider is that the recipient can also reduce the ‘high income child benefit charge’ if they are affected. This is relevant for individuals with an income of more than £50,000, where they or a partner receives child benefit. Alternatively, an individual can be caught be the charge if someone else receives child benefit for a child living who lives with them and they contribute at least an equal amount towards the child’s upkeep.
Royal London points out that if the recipient of a pension contribution from a parent earns £60,000 and 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 after tax relief) would reduce the recipient’s income to £50,000 and eliminate the tax charge.
Topping up a child’s pension can also reduce future inheritance tax bills if it qualifies as a standard exemption, for example if it was classified as a gift.
Steve Webb, director of policy at Royal London, commented: “Not every parent has spare cash to pay in to their children’s pensions, but many will be in a better financial position than their children can expect to enjoy. By paying in to their children’s pension they can give them a triple boost and improve their long-term financial security.”