Retirement planning for future generations.

29 May 2018

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We look at how your clients can start saving for their children and grandchildren’s retirement.

Providing a decent pension to live on is an expensive business. To provide an income of £32,000 p.a. from age 65 would require retirement savings of around £600,0001.

It’s possible for someone else to make a pension contribution on your behalf. So one way doting parents or grandparents can ease the burden for their children and grandchildren is to kick start their retirement savings for them.

Tax relief

HMRC treat the contributions as if they had been made by the child. So assuming the child has no earnings, the maximum gross tax relievable contributions that can be made are £3,600 each tax year. If they do have earnings, the maximum gross tax relievable contribution is 100% of those earnings.

Let’s say Lucy wants to make a pension contribution for her 4 year old grandson Mark. The plan would be set up by Mark’s legal guardian (usually one of his parents) with the contributions madeby Lucy. She could contribute up to £3,600 p.a. gross into the plan but if Mark had earnings (say he appeared in children’s clothing commercials) then up to 100% of those earnings could be paid. If he was a higher rate taxpayer, Mark could claim higher rate tax relief based on his tax situation, not Lucy.

Inheritance tax

The contributions are classed as gifts for IHT purposes but the usual exemptions apply. £3,000 can be paid as an exempt gift and this more than covers the £2,880 net contribution payable if Mark has no earnings. However, if Lucy can show regular contributions can be paid out of her income without affecting her standard of living, they would be exempt without the need to use the £3,000 exemption.

If none of the exemptions apply but Lucy survives for at least 7 years after making a contribution, that contribution would be IHT free via the potentially exempt transfer route.

 

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Last updated: 29 May 2018

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.