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.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.