How To Let Your Children Retire As Millionaires

Lisa Smith, BA (Hons), CeFA

Pensions can be child’s play for British expats looking to make tax-effective savings for their kids.

A little-known money fact is children may not pay tax, but they can benefit from tax relief on pension contributions.

But before expats go stashing their tax-free earnings in a pension, there are some pitfalls to watch out for.

First, check your tax residence.

Only expats who remain UK tax resident can pick up pension contribution relief.

Expats overseas on assignment for a year or two are likely to keep their UK tax residence, and so are their children.

Expats can boost child savings

That means they can benefit from decades of tax efficient saving topped up by the government.

After tax residence, there are a couple of other trip hazards:

  • The maximum annual contribution into a child’s pension is £2,880 a year (2017-18). HM Revenue and Customs (HMRC) adds £720 tax relief to take the annual total contribution to £3,000.

You can stash more in the pot, but this will not attract tax relief and your child may pay some income tax on extracting the money. If that extra cash was put in an ISA, withdrawals would all be tax-free.

  • The money is tied up until the child is 55 years old

The pension to look for is a Self-Invested Pension Plan (SIPP), which offers a wide range of investments via an online platform.

How compound interest works

The child’s parents or guardian can open the pension in the child’s name. Anyone can make contributions and the amounts put aside do not count towards the donor’s annual or lifetime pension allowances.

The benefit of starting to invest early is the impact of compound interest over the years.

Take an investment of £3,000 from birth and the pot will grow to £3.4 million by a retirement age of 70, giving tax-free cash of £850,000 and an annual income of £115,000.

The same money invested in a pension by a 50-year-old is likely to grow to a pot of £1.1 million, with a £277,000 lump sum and £40,000 a year income.

Some families make contributions until the child starts working and can take over the financial burden with the boost of a significant kick-start for retirement saving.

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