The pensions of today, gone tomorrow
Children born today are unlikely to enjoy the same level of retirement income funding that the current level of baby boomers are enjoying. They will need to be more self-providing as support from the state is likely to diminish, and arrangements like final salary pension schemes disappear. If you could afford to put aside £240 a month into a pension for your child or grandchild each year for 18 years, when the child reaches age 60, they could be a millionaire*!
Really? A millionaire?
It sounds too good to be true! But from the moment a child is born, they are eligible to receive contributions of up to £3,600 into a pension each year. Anyone is able to make the contribution on behalf of the child. Unlike other investment options, such as a junior ISA, a pension can provide basic level tax relief even for a child who is not working, making it an extremely attractive long term savings option. On an annual contribution of £3,600, £2,880 is paid by the grandparent and £720 is paid by the government into the pension in the form of tax relief.
Too many of us have experienced the sentiment ‘I wish I had saved more’. Why not give your child or grandchild a head start.
The benefits for you
If as a grandparent you have surplus income from your own pension income, this is an extremely tax efficient way of passing money to grandchildren. If it’s from an income withdrawal arrangement, it will take money out of a 55% death tax charge environment. If the surplus income is created from an annuity payment, the contribution to the grandchild’s pension takes the money out of their estate altogether.
*According to data produced by Skandia. This is based on 6.5% investment growth p.a. and no further contributions being made by the child.