PensionsSep 10 2020

Pensions can prove valuable for regular gifts

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Pensions can prove valuable for regular gifts
ByAmy Austin

The vast majority of savers do not consider pensions as a suitable option for gifting despite the tax advantages, research from Quilter has found.

The firm found a mere 13 per cent of savers who could afford to gift some of their wealth would consider helping with a pension contribution.

Its survey of 1,544 people found the majority would still gift wealth in cash, which was true for both advised and non-advised savers.

But Quilter said for parents and grandparents with sufficient disposable income gifting into a pension was one of the most tax-efficient ways to share wealth with younger generations.

Under current rules, these types of contributions are treated for tax-relief purposes as if the recipient themselves had made the contribution, meaning they could benefit from high rate relief.

Ian Browne, retirement planning expert at Quilter, said cash was an easy way to pass on wealth but it was “far from the most efficient use of money” and individuals could fritter it away.

Mr Browne said: “Advising clients on the most effective way to gift money to their loved ones is a vital way to show the real value financial advice can offer. Unlike an Isa, money contributed to a pension benefits from valuable tax relief.”

He explained that if the gift is £3,000 or less per annum it means inheritance tax will not be payable under gifting rules. 

Mr Browne added: “In fact if the pension contributions are normal gifts out of your client's income, where your client is able to maintain the standard of living after making the gift, then it is not impacted by IHT and they still are able to make more gifts up to £3,000. A structured plan of small regular gifting can really pay off.

"For those younger loved ones the gift of feeling secure in retirement is one that lasts their lifetime. And this should not be mistaken for money that will be helpful in the distant future.

“It means that as they make their journey through life they can use more of their money on the here and now with less concerns of topping up their retirement provision."

Rob Baylis, financial adviser and pension transfer specialist at Atkins Ferrie Wealth Management, said the rules around gifting to pension was less well known than conventional IHT rules and some may be put off by the idea of losing control.

Mr Baylis said: “Many clients are nervous about inheritance tax planning from the outset and particularly about the loss of control of their money. Any discussion where loss of control is an outcome is actually a difficult thing for many clients to accept.”