Saving across the generations/ Children's pensions

George Osborne's Autumn Statement at the beginning of December 2012 bought into sharp focus the way pension contributions have be made, the falling limits of future contribution levels and also the maximum levels of pension 'pots' that can be accrued before penal tax charges would be applied.

This last point noted refers to the pension 'Lifetime Allowance' (or LTA for short) currently standing at £1.5m of total pension value (already fallen from £1.8m), to a new proposed level of £1.25m in the tax year 2014/2015. As an example, benefits that are crystallised in this tax year at a greater value than £1.5m (without existing protection arrangements) could see the balance taxed at a level of up to 55%.

Based on recent economic times, many people in their middle years only dream of having a total pension pot value of £1.5 or £1.25m at retirement. And it is this point that I have received the most client comment, referring to their own situations of probably 'only' achieving a total pension value of 'say' half this LTA value, and then promptly referring to their children who they fear may not even get close to half their parents half.

This has prompted me to remind various clients that they can start pensions for their children at very young ages and put money away into this for their futures. The contribution would normally be limited to a maximum gross contribution of £3,600 in a tax year, with basic rate tax relief bringing this down to a net contribution of £2,880 for the year. Conveniently, this net amount could also fall outside the donor’s estate for inheritance tax purposes as a gift using the annual gift allowance of (currently) £3,000 per annum.

The pension contributions made for the child and the tax relief, which the insurer will reclaim from the Revenue, are invested in a fund which grows in a tax efficient manner.

It is important that you are aware that the value of the pension as well as any income which they generate can fall as well as rise and that past performance is not a guarantee of the future. If you surrender the contract, especially during the early years, you may get back less than you have invested.

In my opinion, the main factor is not the contribution level, but the duration of time for investment that may have the biggest impact. With the minimum age that pension benefits can be drawn now increased to age 55, a child aged 10 has at least 45 years (currently) before they could draw pension benefits. It is this accumulation time that is likely to see significant value being accrued for a child's future use and benefit.

No individual advice has been provided in the content of this blog, and if you would like to consider this opportunity, then please let us know at our office in Guildford. As you can see, saving in a tax efficient way across the generations is something many parents are considering, fuelled by their concerns for their offspring’s financial futures.

Keith Churchouse FPFS
Director
Chartered Financial Planner
ISO 22222 Certified Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.