Tax perk most parents don’t even know about

Paying into your grown up child’s pension can be DOUBLY generous

PARENTS looking for a shrewd way to help their children could try topping up their offspring’s pension pots.

There is nothing to stop mothers and fathers who have taken care of their own retirement from putting money into their grown-up children’s private pension funds.

And as well as boosting their son or daughter’s retirement prospects, a pension present will benefit from a 20 pc tax break bonus from HM Revenue & Customs.

This is because of a little-known feature of the pensions system which means a contribution by the parent is treated as if it had been made by the child — so comes with the tax relief.

It means that if a parent pays £800 into their child’s personal pension, the recipient will still get basic-rate tax relief on the contribution, taking the amount in the pot up to £ 1,000, according to mutual insurer Royal London, which is campaigning to raise awareness of the perk.

And if your child is a higher-rate taxpayer, they are entitled to 40 pc tax relief on the contribution.

But while the 20 pc basic-rate tax relief is automatic, high-rate taxpayers will have to claim the extra 20 pc back from HMRC when doing their annual tax return.

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 £50,000 face a tax charge that increases on a sliding scale until they effectively lose the child benefit at £60,000.

But pension payments from their parents count against their income — enabling them to keep more of the benefit.

For example, a pension contribution of £8,000 (grossed up to £10,000 by tax relief) to someone earning £60,000 would reduce their income to £ 50,000 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.

Millions of younger workers have, this year, been enrolled into making automatic 5 pc contributions toward workplace pensions — on top of an automatic 3 pc from their employer.

But Money Mail reported last month how a 25-year- old on a starting salary of £23,500 that grew 2.5 pc every year would hit 65 with a fund of £104,800 if they stuck to the minimum auto- enrolment contributions. A pot this size would pay out just £316 every month in retirement.

Steve Webb, director of policy at mutual insurer Royal London, says: ‘Not every parent has spare cash to pay into their children’s pensions, but many will be in a better financial position than their children can expect to enjoy. By paying into their children’s pension, they can improve their long-term financial security.’

In Scotland, taxpayers get the same rate of pension tax relief as they pay in income tax — with the exception of starter-rate taxpayers who pay 19 pc income tax and get 20 pc pension tax relief.

You can also save a maximum of £3,600 a year into a self-invested personal pension (SIPP) for a child from the day they’re born. But tax relief for them means you have to pay in only £2,880 a year, and the rest is automatically reclaimed from HMRC.

If you invested the maximum every year until they turned 18 and the pot was left untouched until they turned 64, they would have a retirement fund of £1 million, assuming growth of 5 pc every year.

Retired finance director Derek Hill, 73, set up pensions for his grandchildren Jane, 16, and Jacob, ten, when they were born.

The pensions are Junior SIPPS with AJ Bell — which he chose because it had low charges and a wide range of investments from which to choose. Jane’s pension is now worth £46,000, while Jacob’s is at £41,000.

Derek, who lives in Cheshire with his wife Sue, says: ‘Saving into a pension offers unbeatable tax breaks which immediately boost the pot of money you have, so I decided this was the best place in which to save for my two grandchildren.

‘I want to make sure that they don’t have to worry about money when they’re older.’