As every parent knows, you never stop worrying about your children; even once they are fully grown, enjoying their career and are potentially settled with a home and family of their own.
Our worries about our offspring will always be as diverse as they are many. However, if you are concerned that your adult children are facing greater financial pressures than you did at their age, there may at least be something you can do about it. Helping them with retirement savings could prove to be a very canny move.
It’s particularly tough for those at the start of their working lives or with young families to prioritise their pension over other, more pressing concerns. Rising costs are making it harder to get on to the property ladder, and for those that have made that leap, spiralling mortgage repayments are taking their toll. Parents of young children could also have expensive childcare bills to throw into the mix. They might also have debts to repay.
Auto-enrolment should at least mean your children are putting some money away for retirement, if they are employed (and meet eligibility criteria). But, with minimum required contributions remaining low, at just 8% of qualifying earnings, there’s a strong chance they aren’t putting away enough.
And, if they are self-employed, there’s a significant likelihood that they aren’t paying into a pension at all.
How much can you pay into an adult child’s pension?
Although there are strict rules stipulating how much you can pay into pensions each year and still get tax relief, it doesn’t actually matter who is making those contributions.
This means that if your child isn’t currently working or paying tax, the maximum you can pay in on their behalf is £2,880, which will be grossed up to £3,600 once basic rate tax relief has been applied.
However, if they are taxpayers, you will only be bound by the limits of their annual allowance, which will currently be 100% of their earnings up to a maximum of £60,000 a year.
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As such, there is ample scope for parents with money to spare, to pay significant sums into their children’s pensions, should they so wish.
The hidden benefits of topping up your child’s pension
The obvious reason to pay into a child’s pension is that it will increase their income in retirement.
Thanks to the combination of pension tax relief and compounding returns over the years, a monthly payment of say, £50, into your child’s pension could end up making a much more material difference to their lifestyle in retirement, than it would by chipping in for costs such as childcare or other household bills now.
But the benefits of topping up your child’s pension go beyond boosting their retirement income, it could also cut their tax bill.
If your child’s scheme works on a “relief at source basis”, as most group and individual personal plans like self-invested personal pensions (SIPP) do, only basic rate tax relief will be applied to the contribution automatically. However, if they pay higher-rate tax, they should also be able to claim additional tax relief back through self-assessment to reduce their personal tax bill. This is because the contribution is treated as if it was made from their income and would apply even if the parent making it only pays basic rate tax.
In some cases – for children earning in the region of £50,000-£60,000 a year – topping up their pension might also mean they get to keep more of their child benefit, if they are parents.
This is because if one parent earns more than £50,000 a year, in a household that is claiming child benefit, the amount they get will be progressively stripped away by the “high income child benefit charge”. Once they are earning in the region of £60,000, this tax charge will effectively wipe out all their child benefit.
However, the income HMRC uses in its calculations can be reduced by pension contributions. The more money that is paid into their pension, the lower their income will be. So, if the parents can make enough of a contribution to get their child’s income after pension payments below £50,000, they will also get to keep all their child benefit, without taking a hit to their own income.
Any adult child who gets a pension top-up from their mum or dad will invariably be grateful.
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But from a tax point of view, it can also align with your own financial plans. If you have a potential inheritance tax (IHT) problem on the horizon, for example, giving away any surplus money while you are still alive, means your children get the full benefit of that money, instead of potentially paying 40% tax if they inherit it after your death.
Each year, all of us can give away up to £3,000 inheritance tax free. Or you can make as many regular gifts as you like from your spare income without worrying about IHT, so long as you are able to demonstrate that you can afford to make them without harming your standard of living. Gifts beyond the permitted allowances are known as “potentially exempt transfers”. These gifts become wholly tax-free if you survive seven years.
If you want to ensure any payments into your child’s pension don’t attract IHT after you have died, it’s important to keep thorough records of your gifts. This is particularly important if you are taking advantage of the gifts from regular expenditure exemption.
You might also want to consider pension contributions for your adult children, if you have mopped up all your own annual allowance, and want to carry on investing spare cash in a tax-effective way.
How to pay into an adult child’s pension
Depending on the scheme, arranging a payment into a child’s workplace pension could be tricky to set up and come with an additional charge.
It might make more sense for your child to set up a separate pension, such as a SIPP, and arrange to make either regular monthly payments or ad hoc lump sums into that.
Although your child should always carry on paying into their workplace scheme (to make sure they get employer contributions) there is a logic to directing additional payments to a standalone pot. If your child is changing jobs pretty regularly, any old workplace schemes can be transferred into their SIPP, once they are no longer paying into them.
Small pensions are easy to lose track of. So, holding as much of their retirement savings as possible in one place should make it easier for your child to review their position and ensure their planning is on track.
Online SIPPs are easy to set up and running costs will often be lower than a workplace scheme, particularly older schemes that your child is no longer paying into. Your child will have to select suitable investments to hold in their SIPP, but there are normally “quick-start” options for new investors who might feel less confident choosing funds.
A SIPP could also be a practical solution for your child if they are self-employed and don’t have access to a workplace pension, or if they don’t work at all, for example they are staying at home to raise a family.
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Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.