As well as Junior ISAs you can also take out Children’s pensions for children/grandchildren, investing up to £3,600 gross a year, i.e including tax relief.
The pension is not touchable until they are 55 but it removes the worry and uncertainty they will have for their future. It also means that the fund has a long period of time in which to benefit from stock market growth and ride out the fluctuations. Investing over 30-40 years could potentially build up a significant fund for your child/grandchild when they wish to retire. As per normal pension contributions, children receive 20% tax relief on their contributions at source.
So what does this look like and how could it help? Here is a useful example*:
If you invested £30 a month into your grandchild’s pension, you would actually be investing £36 with the 20% extra tax relief.
Paying into an investment pension paying an average of 5.5% a year (after charges of 1.5% a year) until your grandchild was 18 would amount to £13,200 due to compounded growth. You would only have paid in £6,480.
When the child is 18 it passes to them. If they choose to make no further contributions, it would still be worth £175,000 when they reach 65 due to compounded growth with no withdrawals (not taking into account inflation).
If your grandchild continued to invest up to £50 a month until they were 65, the fund would reach £324,000 in today’s money.
These growth assumptions are based on setting up a child’s self-invested personal pension (SIPP) at birth and paying in £30 a month plus 20% tax relief, achieving returns of an average 5.5% a year (after charges of 1.5% a year) as stipulated in the source example*. These are assumptions only and any growth could be higher or lower than these assumptions.
It could be tax-efficient in more ways than one
The £2,880 per year limit (£3,600 net of tax relief) falls below the £3,000 annual gift limit for inheritance tax. This means you could reduce your estate value for tax purposes, potentially saving IHT tax in the long-run.
Speak to us today about a free initial Pensions and Investments Review which could look at the best options for saving for your grandchildren including considering a Children’s pension and the most efficient ways to reduce inheritance tax. Call us on 0333 456 0333.
You could also leave part of your pension to your grandchildren?
Pensions have always been free of inheritance tax but they used to carry a tax upon transfer after death. In April 2015, the tax on pensions upon death was changed. This means you could leave a large sum of money to your beneficiaries, including grandchildren tax free. You can choose your beneficiaries; it doesn’t have to be next of kin. It may help from a tax perspective to skip a generation and then if your grandchildren are under 16 they can also benefit from tax-free savings and investments. Your grandchildren could make withdrawals from your pension to help fund University, buy their first house or start their own pension fund.
You can receive 20% tax relief even if you are a low or non-earner. Your pension contribution limit is £3,600 gross – a payment of £2,880 to which the taxman adds £720. This is the case even for people who don’t pay tax, such as children and non-earning spouses. If you have UK relevant earnings, then you can add up to £40,000 in the current tax year and obtain tax relief on the contributions based on your annual salary.
If you die before 75, your beneficiaries will not pay tax on income or lump sum withdrawals. If you die after 75, from April 2016 your beneficiaries’ marginal rate of income tax will apply.
You need to check with your pension provider what restrictions are in place, if any. Final salary schemes may be more limiting and some of the new regulations do not apply to these schemes. You should get advice before making any changes.
If this is something you wish to consider, call us on 0333 456 0333 to book a free initial Pensions and Investments Review which will assess what is right for you, based upon your current provisions.
Please note any opinion in these articles is the opinion of Aiming for Utopia Limited only. No action should be taken on the basis of this information alone and we always recommend you seek independent financial advice. We cannot be responsible for the accuracy of content on third party websites.
*Example sourced from http://www.moneywise.co.uk/pensions/managing-your-pension/start-pension-your-child