You are here: Home - Retirement - Retirement planning - News -

Why parents should consider topping up their children’s pension

Written by: Danielle Levy
Making a contribution to your child’s pension can bolster their retirement fund and provide them with a tax refund. Find out how…

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.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

What the August furlough and self-employed grant changes mean for you

From August there will be changes to the government’s furlough and self-employed grant schemes. Here’s what y...
What the August furlough and self-employed grant changes mean for you

Are you an August £1m Premium Bonds winner?

A woman from Cumbria and a man from outer London have become the latest winners of the life-changing £1m Premi...
Are you an August £1m Premium Bonds winner?

Sainsbury’s Bank bans self-employed from credit cards and loans

Sainsbury’s Bank has introduced new lending restrictions which mean it will no longer offer credit cards or lo...
Sainsbury's Bank bans self-employed from credit cards and loans

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

A quick guide to guarantor loans – in association with Guarantor Loan Comparison

Considering a guarantor loan or becoming a guarantor yourself? Read our essential guide...

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

Money Tips of the Week

Read previous post:
isa changes
Regulator cracks down on peer-to-peer investing with new restrictions

Ordinary investors will only be able to invest up to 10 per cent of their assets in peer-to-peer loans from...