Little-known tax trick can boost a child's pension by 25%

Parents with spare cash can help boost their child's retirement even if they are adults.

Millions of younger workers have been newly enrolled into a workplace pension but are only making modest contributions. An additional contribution from their parent early in their working life, benefiting from compound interest, could help boost their retirement pot and is money that cannot be touched until later in life.

25% uplift

A little-known feature of the pensions system however is that the contribution by the parent is treated as if it had been made by the child. 

This means that child immediately gets a 25% uplift on the contribution in the form of basic rate tax relief.

So if a parent pays £800 into their child's personal pension, the recipient will get basic rate tax relief on the contribution, taking the amount in the pot up to £1,000.   

If the child is a higher-rate taxpayer, they can also claim higher rate relief on the contribution made by the parent through the annual tax return process.

Steve Webb, director of policy at Royal London, says:"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. 

"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." 

Child benefit

If the child is a higher earner they could also reduce the tax charge they face when claiming child benefit.

Families gradually lose child benefit on a sliding scale between £50,000 to £60,000.

Money contributed by the parent is deducted from their income helping to reduce their tax charge.

For example, a pension contribution by the parent of £8,000 (grossed up to £10,000 by tax relief) to their child earning £60,000 would reduce the recipient's income to £50,000 for purposes of the child benefit - completely eliminating the tax charge.

Paying into their child's pension may also interest parents up against their own annual limits for pension contributions and have spare cash. Contributions may reduce future inheritance tax bills if they qualify for one of the standard exemptions such as regular gifts made from regular income.

Mr Webb adds: "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."

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.