Wealthy parents with cash to spare can boost the retirement prospects of their children by paying into their pensions.
Current pension rules do not stop parents making contributions into an adult child’s retirement fund, says financial firm Royal London.
And now many have a workplace pension under auto-enrolment for the first time, many are making modest contributions.
“An additional contribution from their parent early in their working life, benefiting from compound interest as it grows, could help them to build a more meaningful retirement pot and is money that cannot be touched until later in life,” says Royal London.
Pension rules say that any contribution from a parent are treated as if they were made by the retirement saver receiving the money.
How the hack works
An £800 contribution picks up 20% tax relief that takes the amount up to £1,000.
However, if the child is a higher rate taxpayer, they can double the tax relief through a self-assessment filing, which reduces the overall amount of income tax p[aid in the year.
The contribution would also help children affected by the ‘high income child benefit charge’.
For the parents, the pension contributions also make a dent in Inheritance Tax as they are an IHT exemption that puts them outside the estate for tax purposes.
Steve Webb, director of policy at Royal London said: “It is a little known fact that a parent who puts money into their child’s pension could be doing them a favour three times over.
“First, the recipient will get a boost to their retirement pot, including tax relief at the basic rate.
Contribution limits
“Second, recipients who are higher rate taxpayers can claim higher rate tax relief on their parents’ contributions which will increase their disposable income. And third, recipients affected by the high income child benefit charge can see this penalty reduced because of their parents’ generosity.
”Not every parent has spare cash to pay in to their children’s pensions, but many will be in a better financial position than their children can expect to enjoy. By paying in to their children’s pension they can give them a triple boost and improve their long-term financial security.”
How much contribution a parent can donate depends on their child’s ‘relevant earnings’ – for example someone earning £25,000 a year paying £3,000 into a workplace pension still has £22,000 available for contribution, but annual contributions must not exceed £40,000 a year.
