Parents who make contributions to the pension pot of their adult child can give a triple boost to their dependant's savings, according to Royal London.
The mutual insurer has launched a campaign to make parents aware of this ‘hidden advantage’, which will boost the retirement prospects of their offspring, with extra tax relief, a possible tax refund, and a potential reduction in their child benefit cut if they are high earners.
Under current rules, there is nothing to stop a parent making a contribution into the pension of an adult child.
However, according to Royal London, a little-known feature of the pensions system is that the contribution by the parent is treated as if it had been made by the recipient.
This means if a parent pays £800 into their child’s personal pension, the recipient will get basic rate tax relief on the contribution, taking the amount in the pot up to £1,000.
The mutual insurer also stated that 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 increase the tax relief given to the recipient.
Last but not least, 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.
Since 2013, working families where one parent earns more than £50,000 face a special tax charge on child benefits.
The high-income child benefit charge is worked out as 1 per cent of their child benefit for every £100 earned above the £50,000 threshold, up to a maximum of 100 per cent.
So, for example, if the recipient is earning £60,000 and therefore faces a child benefit tax charge of 100 per cent of their child benefit amount, a pension contribution by the parent of £8,000 (grossed up to £10,000 by tax relief) would reduce the recipient’s income to £50,000 for purposes of the child benefit and would completely eliminate the tax charge, Royal London added.
Sir Steve Webb, former pensions minister and director of policy at Royal London, said: "Not every parent has spare cash to pay in to their children’s pensions, but many will be in a better financial position than their children can expect to enjoy.
"By paying in to their children’s pension they can give them a triple boost and improve their long-term financial security."
maria.espadinha@ft.com
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