Policy director Steve Webb said putting money into their children’s pension will boost the retirement prospects of their offspring (topped up by tax relief), they could also earn their children a tax refund (if they are higher rate taxpayers) and could reduce the tax hit the children face if they are a higher earner receiving child benefits.
Under current rules, there is nothing to stop a parent contributing into the pension of an adult child and it being treated as if it had been made by the recipient, who will then get basic rate tax relief on the payment.
Webb also flagged up two further benefits to the recipient.
“If the recipient is a higher-rate taxpayer, he or she can claim higher rate relief on the contribution made by the parent; this would be done through the annual tax return process and would reduce the tax bill of the recipient.
“If the recipient is affected by the ‘high income child benefit charge’ and is earning in the £50,000-£60,000 bracket (or slightly above), the money contributed by the parent is deducted from their income before the high income child benefit charge is worked out, thereby reducing their tax charge.”
Apart from wanting to help their children, parents may be interested in this idea particularly because:
- They may be up against their own annual limits for pension contributions and may therefore have spare cash; and
- Contributions may reduce future inheritance tax (IHT) bills if they qualify for one of the standard exemptions, such as regular gifts made from regular income.
The amount that the parent can contribute with the benefit of pension tax relief is not limited by the parent’s pension tax relief limit but by the limit that their children face – which in many cases will be up to their annual salary or £40,000 ($50,837, €45,144), whichever is the lower.
Webb added: “Not every parent has spare cash to pay into their children’s pensions, but many will be in a better financial position than their children can expect to enjoy.
“By paying into their children’s pension they can give them a triple boost and improve their long-term financial security”.