Helen Mulvaney, proprietor of Richmond Independent, a long-established independent financial…
Using your Inheritance Tax (known as IHT) annual allowance or your gifts from normal expenditure allowance, you can fund a pension for a grown-up child or even a grandchild. Funding a pension by using these allowances means that the contributions fall out of your estate immediately and (if your estate is large enough to be chargeable to IHT) then you`ll save 40% in IHT. This is a useful gift, especially if the grown-up “child” is a higher rate taxpayer because the contribution is treated as being made by the “child” and therefore the higher rate tax relief can be reclaimed by the “child” via HMRC – making an welcome cash contribution to the family household income.
The pension fund cannot be accessed by the “child” until they reach age 55 (at the moment, although this could be later in the future). I suggest that this might be a very useful strategy, because, the State Pension Age has been increasing and also in the future the State Pension might be less generous than it is at the moment due to the escalating costs. Furthermore, this strategy may help the family finances if higher rate tax relief can be claimed whist reducing the burden of pension contributions for the “child”.
The benefits can be summarised as follows:-
- The estate of the donor reduces – therefore reducing any potential IHT.
- Basic rate relief will increase the gift immediately by 25%.
- The recipient/”child” might benefit from higher or additional rate tax relief.
- A pension contribution might help if the grown-up “child” is in the child benefit tax trap.
- The pension fund enjoys a tax favourable environment.
- This is a gift which could relieve the “child” of the burden of making pension contributions when family finances might be stretched.
- In the event of the death of the “child” before 75 then a tax free lump sum death benefit might be payable.
- Please note that a pension is a long term investment. You cannot normally, under current legislation, access your pension until age 55. The value of your pension may fall as well as rise and you may get back less than you invested. Pension and tax legislation can and does change.
Please contact Helen Mulvaney of Richmond Independent for further details. Tel 01395 512166
Richmond Independent is a trading name of Investment & Financial Solutions Partnership LLP which is authorised and regulated by the Financial Conduct Authority