Many better-off clients are understandably focused on how they can maximise contributions into their own pension, whilst grandparents are often interested in giving their school age grandchildren a start on their pensions journey. But one area that’s often neglected is the advantage of contributing into a pension for a working age adult, such as a son or daughter. This can provide a triple bonus to the recipient as well as potentially reducing the size of the donor’s estate for inheritance tax purposes.
What isn’t widely understood is that if someone pays money into your pension, this contribution is treated as if you made it. For the recipient, this brings three potential benefits:
From the point of view of the donor, combined with the pleasure of helping their child build a bigger pension, this transfer potentially reduces the size of their estate for inheritance tax purposes provided it satisfies one of the tests for exclusion from IHT. This includes a gift made more than seven years before the donor dies, a regular gift which doesn’t reduce the donor’s standard of living or anything within the annual £3,000 ‘gift allowance’.
There are other options for older clients with money to spare. If they’ve exhausted their own annual or lifetime limits on pension savings, they may have a spouse or partner who hasn’t, and this is someone else who might be happy to receive a contribution into their pension. Of course, the donor must be careful not to run down their own wealth and risk leaving themselves short of money in later life.
But there can be no doubt, the potential for supporting an adult child through a pension contribution is probably a neglected area of family financial planning and one which can benefit donor and recipient alike.
Director of Policy and External Communications
Steve Webb is Director of Policy and External Communications at Royal London. Before this he was Minister of State for Pensions between 2010 and 2015, the longest-serving holder of the post. During that time he implemented major reforms to the state pension system, oversaw the successful introduction of auto enrolment and played a key role in the new pension freedoms implemented in April 2015. He was awarded a knighthood in the 2017 New Year’s Honours.