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.
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 made by 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.
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.
1 Money Advice Service: paid monthly in arrears, single life, no annual increases and no guarantee period.