Did you know that in 2019-20 you can put up to £2,880 per year into a pension for your grandchild (i.e. £240 per month), regardless of their age?
Conveniently, this £2,880 also falls into the £3,000 annual limit on gifts, which are exempt from Inheritance Tax. Moreover, any money which is placed into your grandchild’s pension receives tax relief, effectively acting as a Government “top-up” to your contributions. This tax relief amounts to 20% on the contributions. So, if you put the full £2,880 per year into your grandchild’s pension, they would also receive £720 in the form of tax relief. To be clear, a grandchild can only receive one annual net payment of £2,880 into a pension so two grandparents cannot contribute £2,880 each.
All of these benefits can lead many grandparents to seriously consider making contributions to a grandchild’s pension as they feel it allows them to leave a more meaningful Inheritance to their beneficiaries via Inheritance Tax reduction.
Pensions for Grandchildren: Pros & Cons
As you know, today’s UK State Pension is unlikely to cover most people’s outgoings in retirement. With both the UK’s overall population and life spans projected to increase over the coming decades, the pressure on future Government’s pension budgets is likely to be stretched even further.
In light of this, the main advantage of setting up a pension for your grandchild is so you can potentially make a significant difference to their financial future by:
- Reducing their future reliance on the State Pension.
- Reducing the pressure of them having to make their own pension contributions.
The other attractive benefit to starting a pension for your grandchild (particularly if they are very young) is that the funds you invest in have more time to grow.
For instance, let’s give some thought to how much a single lump-sum contribution of £2,880 into your grandchild’s pension could potentially grow over 30 years, 40 years and 50 years (assuming a 5% annual rate of return). Whilst there are many variables to consider, broadly speaking values could be in the region of:
After 30 years: £12,447.19
After 40 years: £20,275.17
After 50 years: £33,026.11
However, the main disadvantage to consider before setting up a pension for your grandchild relates to accessibility. Under the existing pension rules in 2019-20, you cannot access money in your pension pot(s) until you are at least 55 years old.
So, if your loved one wants to use the money for a house deposit, to cover wedding costs or to help fund their way through University, then they will most likely be unable to do so. Bear in mind that the age you can access your non-State Pension(s) is also set to rise to 57 by 2028 and is it possible that this could rise even further in the distant future.
Some clients prefer to gift money to their grandchild’s Junior ISA or other investment, whilst committing other funds towards their pension. This way, the grandchild can benefit from having investments building for their future retirement, whilst allowing easy access to other funds they may need for a house deposit, wedding or another important life event.
Choosing a Pension for Your Grandchild
Certain types of pension are prohibited when setting up a pension for a grandchild. For instance, you cannot set up a workplace pension on their behalf. However, you should be able to arrange a Personal Pension Plan.
As there are different types of Personal Pension to choose from, it’s a good idea to speak to us first. You could choose to open a SIPP for your grandchild (Self-Invested Personal Pension), which can offer a fairly wide range of investment choices, but bear in mind that these pensions can often carry higher charges when it comes to investment management fees so its best if we are involved to help you find the most competitively charged contract. We can help you choose the right SIPP from the wide range available including “Child SIPPs” or “Junior SIPPs” targeted specifically at grandparents who are interested in setting up a pension for their grandchild.