Warren Shute is a multi-award-winning Chartered Financial Planner, certified money coach, bestselling author and Sunday Mirror columnist
If you want to give your children and grandchildren a gift they will never forget, consider opening or topping up a pension for them.
I know just how important the children and grandchildren of my clients are to them, and it’s only natural that they want to do something to help them financially.
Although before investing for others, I believe you should secure your own financial position first, a theme I discuss in my book The Money Plan.
There is nothing to stop parents and grandparents who have taken care of their own retirement from putting money into their children’s or grandchildren’s private pension funds – even if the child is grown up and is earning a salary of their own.
Also, as well as boosting their child or grandchild’s retirement prospects, a pension payment will benefit from a 25% tax break bonus from HMRC.
This is because of a little-known feature of the pensions system, which means a contribution by the third party is treated as if it had been made by the child and therefore it comes with the tax relief.
This means that if a parent pays £100 into their child’s personal pension, the recipient will still get basic-rate tax relief on the contribution, taking the payment into the pot up to £125. If your child is a higher-rate taxpayer, they are entitled to 40% relief on the contribution.
While the 20% basic-rate tax relief is automatic, high-rate taxpayers will have to claim the extra 20% back from HMRC when doing their annual tax return, or by writing a letter requesting the tax relief from HMRC.
What’s more, if the child is a higher earner, any pension contribution from their parents could reduce the tax charge they face when claiming Child Benefit.
Families where one parent has a salary over £60,000 face a tax charge that increases on a sliding scale until they effectively lose the Child Benefit completely at £80,000.
Pension payments from their parents count against their income, enabling them to keep more of the child benefit.
For example, a pension contribution of £8,000 (grossed up to £10,000 by tax relief) to someone earning £70,000 would reduce their income to £60,000 for purposes of the tax charge, allowing them to claim child benefit in full.
The idea of paying into their children’s pension might also appeal to parents who have spare cash after reaching their own annual pension contribution limits. It could also cut future inheritance tax bills as you pass money to the next generation.
When your child or grandchild retires and draws down on their pension, they won’t be able to forget who paid into it for them, a gift with a lasting memory.