The parental pension perk – How it could pay if you contribute to your child’s pension

The pension perk for parents – How it could pay if you contribute to your child’s pension

Ensuring that you pay into your pension throughout your working life is very important to provide for your retirement. However, if you are a parent you might have thought about contributing to the pensions of your children. If you have, then both of you are in luck! as pension contributions to your child’s pension can bring with it some serious financial benefits. This blog will provide a guide of the pension possibilities you can be part of with your children, delivering pension and tax rewards to both generations. You may be surprised about how much you and your family can benefit from pension contrition made by other members of the family, namely parents.

 Helping your children financially

Contributing to your children’s pension pot, also allows your children to benefit from a tax refund if they are a higher rate taxpayer. Better still, it could also reduce the amount of money they will lose as a higher taxpayer on child benefit.  Following recent pension reforms, millions of young people are now in a position to contribute to their pension funds, however many of these payments are small and will limit the amount of benefit the pension sum can deliver. These small contributions are often in stark contrast to the pension payments made by their parents. This imbalance between the generations can be altered by parents opting to pay into their children’s pensions, providing security for their children in later life just as they have. However this arrangement may not be suitable for all families and could create financial problems for some warns the Financial Times Adviser. It points out that ‘the money will be unavailable until the children are in their fifties’ and therefore the children could be in financial difficulty between now and then. While possibly placing the parents in imminent financial trouble.

How it works

A little-known but major benefit of a parent pension contribution is that the contribution amounts are treated no different than if they had been made by their children, whose pension it is. This means that the 25% uplift the children receive on their pension contributions from tax relief is also applied to contributions made by their parents when they make payments into the pension fund. So, if the parent makes a pension contribution of £1000 into their children’s pension, the actual amount the pension fund would receive would be £1250. That’s not all, if the child is a higher rate taxpayer, they can claim tax relief on the amounts paid into their pension funds by their parents. Parents paying into their children’s pensions can provide a triple benefit for their children’s pensions.  Making the contribution along with the standard tax relief uplift and higher tax rate relief means the amount of money available to the children increase beyond the pension payment itself. Adult children claiming child benefit can have the charge reduced due to the pension payments of their parents.

Reducing costs

If adult children claim child benefit, then they can have the charges of the benefit reduced. This happens when pension contributions by their parents are made into their pension funds, saving them money. Pension contributions made by parents into their children’s pensions funds, who claim child benefit are able to gain more income because the pension contributions are counted as income, therefore increasing the amount of income for the children. This will reduce the amount of child benefit charge they need to pay. In line with the contributions, the larger the contribution the lesser the charge. This means the children could pay no charge at all if the contribution from the parents is large enough.

Preparing for the future

There is a substantial amount of money available to younger generations who can benefit from extra cash injections from their parents as a one-off or as a long-term arrangement. This allows you to allocate any spare cash that you may have and wish to invest, along with saving your children even more tax when you pass away. Not every parent has spare cash to give to their children, however, many do, and giving this cash can help you to avoid inheritance tax and give money to your children’s pension funds when contributions to your own may be at a maximum.

Now you can plan and fund not only your own retirement, but your children’s also. This is a good opportunity to research further and find out about pension schemes and how you can fund and benefit from them. To do this you can look at the government website that can give you more information on how you can get up and running with securing your children’s retirement and long-term happiness. Furthermore, if you would like to speak to a tax advisor to help you to make an informed decision about your tax and pension arrangements then you can contact Contractor Unlimited, who will be able to give experienced and knowledgeable insight and assistance about your options and how you may wish to proceed. Don’t hesitate to provide for your children and support them in their own retirement as you hope to be supported in yours.