CHILDREN AND FINANCIAL PLANNING
Synopsis: Making pension contributions for children can be a very effective part of the overall plan for securing a child’s financial future and encouraging them to save.
There is, understandably, reasonably regular ‘air time’ given to investing for children to meet the costs of higher education and ‘getting on to the property ladder’. Tax efficient savings such as NISA (invested in by a parent or grandparent in their own name), JISA and collectives held in trust (giving control and tax efficiency) are all referenced in connection with regular savings. Offshore bonds (assigned after age 18 or held in a trust) can be very effective for those with lump sums.
As well as the ‘nearer term’ needs of education and property purchase, many parents and grandparents also have concerns about what the longer term financial future of their children and grandchildren will look like. They see that, for many, even once through education and even married or in a long term relationship, saving is still very difficult. For parents and grandparents who have the wherewithal (and especially those who would be attracted by strategies to reduce their own IHT liability), contributing to a pension arrangement for a child could look very appealing.
At a very simple level a contribution of £2,880 will be grossed up to £3,600. Over a reasonable period this could grow (with tax free growth on the funds) to a worthwhile pension fund. For example, such contributions from birth to age 65, with reasonable growth, would create a fund in excess of £1 million at retirement.
When contributions are made by third parties to a pension for a child, the amount paid (but not the HMRC contribution of tax relief) is regarded as a lifetime transfer but it will be exempt (as normal expenditure or within the annual exemption) or potentially exempt so will rarely give rise to any adverse IHT implications.
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