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

Why parents should increase their pension contributions

0
Written by: Emma Lunn
26/04/2021
Higher rate taxpayers could gain £18,500 on child benefit payments and leave themselves £120,000 better off in retirement, according to calculations by Quilter.

The wealth management company examined the situation for a family with two young children with one parent earning £59,000. It found that if this parent increased their pension contributions by £467 per month, it would enable them to claim back more than £18,500 over the 12-year period that their children are eligible for child benefit payments.

The calculations assume someone already has a £100,000 pension pot at age 40 and contributes £100 every month.

A family with one child can claim up to £1,094 a year in child benefit and nearly £1,800 a year if they have two children.

The high income child benefit tax charge was introduced in 2013 and affects families where one parents earns more than £50,000 a year. Those with income over this figure are required to pay 1% income tax on the child benefit for each £100 of income above this. This means the value of child benefit is eroded to nil once the taxable income of one of the adults exceeds £60,000.

But the high income child benefit cap (HICB) is on income after pension contributions, so if someone pays more into their pension they can fall below or closer to the threshold. This means they can increase the amount of child benefit they receive while also taking advantage of the tax relief on pension contributions.

According to Quilter, due to the additional tax relief on pension contributions for higher rate taxpayers and the extra child benefit payments, this would mean that it would cost someone just over £35,000 in total over 12 years to gain just under £49,000 from these two tax benefits.

The long-term result would be to increase their pension pot by over £122,000 at age 65, assuming a modest growth of 2% after charges and inflation.

Ian Browne, pensions expert at Quilter, says: “The child benefit system is incredibly complicated and wage inflation has gradually pushed more people over the high income child benefit threshold meaning fewer and fewer families are claiming child benefit each year. At the most recent budget, the higher rate tax threshold has been frozen at £50,270 but the high income child benefit threshold of £50,000 has not changed with it meaning basic rate taxpayers will get caught for the first time.

“However, parents often don’t realise that they can receive much more in child benefit payments by upping their pension contributions while also setting themselves up for a more prosperous retirement and taking advantage of the favourable tax relief available. Although this does mean that someone has to increase how much they are saving for retirement, the benefits mean that the ultimate gain far out strips the spend.

“There is still a significant proportion of people in the UK who are not saving enough for retirement and utilising this quirk in system could help them achieve their retirement aspirations. Everyone’s financial circumstances are different and seeking professional financial advice is always best to ensure that your whole financial life is accounted for.”

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.

PayPal closing down Money Pools

The ability to create new Money Pools will be disabled from 30 September, while existing Money Pools will be s...
PayPal closing down Money Pools

The savings accounts paying the most interest

Savings rates have increased over the past month, so it’s the ideal time to move your cash savings to a higher...
The savings accounts paying the most interest

NS&I increases interest rate on income bonds

National Savings and Investments (NS&I) has increased the interest rate on its Income Bonds by 14 basis po...
NS&I increases interest rate on income bonds

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