Generational pension planning: can your pension help fund the next generation’s retirement?
If you've come to the realisation that you have more than you will need in your lifetime, thoughts may turn to those who you would like to benefit.
The kids, probably. Grandkids, definitely. Nieces and nephews, maybe. Friends, perhaps. HMRC, not if I can help it…
More and more, we’re helping clients make the most of both their finances, and that of future generations. Have you considered if you could be doing more to give those closest to you a financial step up? Experience shows us gifting provides considerable personal satisfaction as well as minimising any potential inheritance tax (IHT) burden.
You can make significant outright gifts. We regularly see parents and grandparents make smaller regular gifts, especially when they have several children or grandchildren. They use the annual gift allowance of £3,000 and use the small gifts allowance of up to £250 each year for as many people as they wish, provided they have not received any part of their £3,000 allowance.
In addition, an often underutilised rule is to make gifts out of surplus income (allowable if you have excess income). There are rules involved, but with proposed changes around pensions and IHT, this is expected to become more commonly available.
The majority of other gifts, above these forementioned allowances, will start a seven-year clock for IHT purposes and this can concern clients. However, for many, the biggest issue with gifting is around control and ensuring the funds are not misappropriated.
Children or young adults may not be considered responsible enough to handle a lot of money. There can be concerns about making it too easy, too young, and there may be a want to keep drive and hunger for the next generation that perhaps you experienced yourself. This may even be a concern with adult children, yet, there are other ways to support them financially.
Third parties, such as grandparents, can pay into Junior ISAs (JISAs). Although these need to be opened by a parent or guardian, anyone can contribute up to a total of £9,000 per annum per child.
Whilst they offer the potential for long-term growth, control of the JISA passes onto the child at age 16 and from age 18, the JISA can be accessed by the young-adult owner. As you can imagine, if you have funded a JISA for 18 years, it could have a very substantial amount in it.
If this is a concern which would hold you back from funding investments for the next generation, you may want to consider the use of Trusts. Trusts allow you to both control the investments and access, and make gifts for IHT planning purposes.
For a longer-term investment, a parent or guardian could set up a Junior Self-Invested Personal Pension (SIPP) to gift money into. Technically, you could gift up to £60,000 gross per annum into the SIPP, but the tax-relievable amount is limited to the individual’s relevant earnings. So, for most children a net contribution of £2,880 can be made. This is uplifted to £3,600 with basic-rate tax relief even though they probably don’t pay income tax — a small win. The funds sit within a pension and are subject to normal pension rules, for example, withdrawals can’t be made until age 55 (changing to 57 from 2028 and will probably be pushed back further for future generations). This is the ultimate long-term planning tool. It could be decades before they realise the value of a gift to a junior SIPP, however, with the power of compounding, it’s one strategy that could come up trumps for younger people in your family.
Grandchildren aren’t typically thinking about retirement. That may not be the case for your children, though. With the retirement landscape having changed dramatically over just a few generations, those who are in their 30s, 40s and 50s are less likely to have the security of final salary pensions that previous generations enjoyed. We often hear about funding junior ISAs and junior SIPPs, yet, this is something you can replicate for adult children and potentially with greater financial impact. Funding pensions for adult children could help with creating tax reclaims, keeping or being able to receive child benefit, offsetting the removal of personal allowances and retaining tax-free childcare, as well as ensuring they will have enough to live comfortably in retirement.
We are seeing clients funding pensions and ISAs for their next generation as part of the family financial plan and expect this to become even more commonplace as a wealth creation strategy.
Find out more
If you would like to discuss setting up a plan to benefit your family from this generation to the next, please don't hesitate to get in touch with a member of our Wealth team, or by filling out the short form below.
Disclaimer
Johnston Carmichael Wealth Limited, now owned by Partners Wealth Management, is authorised and regulated by the Financial Conduct Authority.
Please note: This communication should not be read as financial advice. While all possible care is taken in the completion of this article, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.
All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices. Legislation and the levels and bases of reliefs from taxation are subject to change and are dependent on your individual circumstances.
The Financial Conduct Authority does not regulate tax and estate planning.