If you want to improve your children’s long-term financial resilience, contributing to their pension could be a fantastic way to do so. 

While it’s common to gift money or other assets to loved ones, pensions are often overlooked. Yet, the tax treatment of pensions could mean they’re a great way to pass on wealth and support their wellbeing. Here are five reasons why making contributions to your child’s pension could make sense. 

1. They may not be saving enough

Saving for retirement can be a daunting task. Even if your child already has a pension, they may not be saving enough to reach their goals. 

A report from the Institute for Fiscal Studies suggests almost 90% of workers are saving less than 15% of their earnings – the amount deemed appropriate by Lord Turner’s Pension Commission. So, many could find they face a shortfall at retirement. 

What’s more, the cost of living crisis means some families are contemplating reducing pension contributions. According to FT Adviser, 19% of pension schemes have been asked about decreasing or stopping contributions. 

Depositing contributions on a child’s behalf could make a huge difference when they retire. It may also provide peace of mind now if they’re worrying about how they’ll cope financially when they give up work. 

2. They won’t be able to access the money until retirement age

If you want to lend financial support but are worried about how your child will use the gift, a pension could be a solution.

Money added to a pension isn’t usually accessible until the pension holder is 55, rising to 57 in 2028. So, you know they can’t access the money now and they can use it to support later-life goals. 

However, this could be a potential drawback too. Your contributions may not be accessible at the right time to help your child reach other goals, like buying a property or sending their own children to private school. So, it’s worth speaking to your child to better understand what their priorities are. 

3. The contributions will benefit from a tax relief boost

To encourage people to save for retirement, the government gives tax relief on pension contributions. It means your gift goes even further.

Tax relief is given at the highest rate of Income Tax the pension holder pays, so basic-rate taxpayers will receive 20% in tax relief. If your child is a higher or additional-rate taxpayer, they could benefit even more.

The Annual Allowance limits how much can be contributed to a pension each tax year while still retaining tax relief. The Annual Allowance is up to £60,000 or 100% of annual earnings, whichever is lower, in the 2023/24 tax year – high earners may be affected by the Tapered Annual Allowance, which can be as low as £10,000.

So, it’s important to understand your child’s income and other contributions going into their pension. 

4. Pensions are usually invested over the long term

Typically, money held in a pension is invested. This provides an opportunity to benefit from long-term investment growth.

While investment returns cannot be guaranteed, historically, over a long time frame, investment markets have grown in real terms.

Over the decades money is invested through a pension, it could grow to create greater financial freedom in retirement for your child. 

5. You could use the contributions to mitigate a potential Inheritance Tax bill 

If your estate could be liable for Inheritance Tax (IHT), there are often steps you can take to mitigate a potential bill, including making gifts during your lifetime.

You should be aware that some gifts may be considered part of your estate for up to seven years for IHT purposes. One option is to make regular gifts from your usual income – such as making a monthly contribution to your child’s pension – which would be considered outside of your estate immediately. 

Understanding IHT gifting rules can be complex, so professional financial advice can be valuable. You should also keep records of gifts you’ve given. 

Could you leave your pension to your loved ones?

Contributing to your child’s pension isn’t the only way you can use pensions to pass on wealth – you may choose to leave your retirement savings to a loved one too.

Pensions are usually considered outside of your estate for IHT purposes, so your retirement savings could be an efficient way to pass on wealth. 

Rather than IHT, an inherited pension may be liable for Income Tax, depending on the age you pass away and how the beneficiary accesses it. Even if they pay Income Tax, the rate could be lower than the standard 40% rate of IHT.

Pensions aren’t covered in your will. Instead, you’ll need to complete an expression of wishes to let your pension provider know who you’d like to receive your savings. 

Contact us to discuss how you can help loved ones achieve long-term financial security

As your financial planner, we’ll help you balance your own aspirations with the support you want to lend to children or other loved ones. Contact us to arrange a meeting. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.