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Nov 02
0

The role of a trustee

By | Trusts

Trusts can be very useful vehicles that can help manage assets. Unfortunately, many people find trusts confusing and daunting, and acting as a trustee carries significant levels of responsibility.

What is a trust?

In simple terms, a trust is an arrangement where assets are held and managed by an individual or individuals (known as trustees) on behalf of another individual or individuals (known as beneficiaries).

Trusts can be created for many different reasons and to suit different purposes. Many trusts are created in a will, whereby the will instructs the trustees to look after funds for another person or group of people. Some trusts are created by an individual when they are alive, with a view to passing on assets to help reduce tax. Other trusts are established when an individual is incapacitated or too young to look after the funds themselves.

The role of a trustee

Whatever the trust arrangement that has been established, each trust needs to have at least one trustee (although it is desirable to have at least two). The trustees have legal responsibility for the funds held in trust, and have a duty to manage the assets held in trust and ensure that the trust meets its purpose and objectives.

Trustees owe a fiduciary duty to the beneficiaries, to act honestly, in good faith and with loyalty. Every decision made by a trustee needs to be made in the best interests of the beneficiaries. Trustees also need to act unanimously when reaching decisions in relation to the trust assets.

A trustee may be appointed in a will, and it is normally the case that the executors of the will automatically become trustees of any trusts created by the will. When a trust is created during an individual’s lifetime, the person creating the trust (known as the “settlor”) will need to choose the trustees who will carry out the role. Many opt to appoint family members or friends to act as trustees. This may prove beneficial as the family member or friend may well have good knowledge of the family’s circumstances; however, the individual taking up the role may not have any experience of the legal obligations placed on them, or the time that will be taken in fulfilling their duties.

An alternative to appointing a family member or friend is to appoint a professional trustee, such as a Solicitor. By appointing a professional trustee, this will ensure that an impartial, experienced individual is handling the decisions on behalf of the settlor.

Getting guidance on acting as trustee

For those who are appointed as a trustee in a will, or an individual appointed as trustee of a lifetime settlement, it is important to fully understand the purpose of the trust and seek guidance on the specific requirements, in particular in relation to assets held by the trust. These will be contained in the will (in the case of a trust created on death) or in the trust deed for a lifetime trust. This will set out the specific instructions that the trustees must follow and can cover a number of aspects, from how monies are to be held, the investment powers that the trustees have, and when funds should be paid to beneficiaries. It can also provide directions as to how income generated by assets held in the trust is to be dealt with. When a trust contains residential property, trustees may have further duties to comply with, such as ensuring that the property is adequately insured, and maintaining and repairing the property.

Trust investment powers

Most trusts provide the trustees with wide investment powers, which leaves the trustees with a decision to reach when deciding how trust funds are invested. Under the Trustee Act, trustees have a duty to obtain proper advice before making a decision, unless the trustees reach the conclusion that there are exceptional circumstances where advice is not needed. This could, for example, be where the amount of money left in trust is considered to be too small to warrant advice; however, this judgement call needs to be made by the trustees’ themselves.

FAS Trustee Service

At FAS, we have considerable experience in providing independent investment planning and advice to Trustees, through our Trustee Service.

We appreciate that the precise requirements of each trust will be different, and we therefore initially take the time to fully review the trust documentation to understand the terms of the trust and highlight the important considerations. We can manage Trust investments on an advisory or discretionary managed basis, with all investment decisions made by our experienced in-house Investment Committee. The majority of trustees choose our discretionary managed service, as this ensures that the trust investment portfolio is reviewed and rebalanced at least four times a year. This also helps reduce the amount of administration involved when making changes to the trust portfolio.

Given that the Trustee Act requires trustees to review a trust regularly, we carry out an in-depth review at pre-determined intervals. This comprehensive review covers the investment performance, matters relating to the trust and ensures that the trust portfolio can readily adapt to any change in circumstance. These regular reviews, and follow-up reports, can also assist the trustees in their audit trail to demonstrate their compliance with the requirements of the Trustee Act.

If you have been appointed as a trustee, or wish to review an existing trust, speak to one of our experienced advisers.

Oct 26
0

The quest for real income

By | Investments, Savings

Base interest rates have increased sharply over the last 18 months, as Central Banks aim to tackle high levels of inflation. As a result, interest rates on cash deposits have increased and those who look to produce an income from savings and investments can now generate relatively healthy levels of interest from deposit accounts.

On the face of it, cash is a risk-free investment, as the initial cash balance deposited does not fluctuate in value; however, the hidden risk in holding cash is the eroding impact of inflation. Let’s look at a typical savings account that is paying 4% annual interest before tax, which was opened one year ago. At face value, holding a deposit in this account will have earned 4% return and you will still hold your capital value. The hidden risk is that the real value of the cash deposited – i.e. adjusted for inflation – will have fallen. At the time of writing, the rate of UK inflation over the last 12 months has been 6.7%, which means that the amount deposited will be worth 2.7% less in real terms than when the account was opened. There are other risks of cash too, as the highest paying accounts restrict access to your money, and attention needs to be paid to the limits afforded by the Financial Services Compensation Scheme.

As we move into 2024, we expect interest rates to fall as inflationary pressure eases further, and the eye-catching rates on offer now may be a distant memory in twelve months’ time. This leaves investors who are holding cash needing to find another home as a way of generating income. This is where Equity Income investments have a real advantage over time, and as part of a diversified portfolio, can look to generate an attractive and rising income yield.

Look to dividend income

Part of the return from holding Equities are the regular distributions of excess profits, in the form of dividends. Most mature companies declare dividends to shareholders at regular intervals, and a company that enjoys a strong performance may well look to increase its’ dividend payments over time, which could potentially offset the effects of inflation.

There are a number of global stocks that have a track record of increasing dividends year on year, with the likes of Coca- Cola, IBM and Johnson and Johnson being prime examples of US listed global companies who have consistently raised their dividends each year for the last 25 consecutive years. The UK also has a smaller list of companies who have consistently raised their dividends, such as British American Tobacco and Diageo.

Dividend income is only one part of the potential return that can be achieved from holding Equities, as holding company shares can also offer scope for capital gains over time. Whilst Equities will introduce short-term volatility – which is not a feature of cash accounts – the long-term track record of returns generated by Equities markets highlights the capacity for Equities to significantly outperform returns achieved from cash deposits.

Spreading the risk

Dividends are, however, not guaranteed, and by holding individual Equities you introduce stock-specific risk. Changes in the fortunes of the company in which shares are held can not only impact the share price, but also the potential for dividend growth. Indeed, a company that begins to struggle may look to cut its’ dividends, or cancel it altogether.

As a way of mitigating this risk, we would suggest that holding Equity Income funds is a more appropriate way of gaining access to companies that pay an attractive dividend stream. This can help avoid the potential for issues with one particular company or sector having too great an impact on the overall fund value. Whilst there are a limited number of passive investments that specifically target stocks with increasing dividends, the majority of Equity Income funds are actively managed. This is where a manager or management team will look to select positions and build the portfolio, with a view to holding companies that offer an attractive and increasing dividend yield, and good prospects for capital growth over the longer term.

Equity Income funds cover most geographic areas of the World, providing access to dividend producing companies from the UK, US, Europe and Far East. There is also a wide range of Global Equity Income funds, where the fund manager can select the most appropriate positions from anywhere in the World.

As the performance of an actively-managed Equity Income fund relies on the skill of the manager, it is important to select the right fund – or blend of funds – to seek out the best performance. The level of income, and overall return, achieved from within the Global Equity Income sector can vary significantly from the best to worst performance over time, and this is where careful analysis of the fund, portfolio strategy and management style are crucial. The FAS Investment Committee regularly meets with leading fund managers from all sectors, including those who manage Equity Income funds. These regular meetings strengthen our quantitative approach to fund selection, so that we can truly understand the methods and rationale behind the portfolio selection process.

Equities as part of a diversified portfolio

It is important to point out that Equity Income funds are one of a range of different options for those seeking an income from their savings or investments. Cash deposits absolutely have a place in most sensible financial plans; however, the amount held in cash needs to be considered carefully, as the hidden eroding impact of inflation over time can easily eat into the real value of deposits.

Speak to one of our experienced advisers to discuss the options to generate an income.

May 01
0
pebbles at a beach

How A Financial Planner Can Help During Divorce

By | Divorce

Divorce is one of the most emotional experiences a person can go through and dealing with the financial implications of this can be one of the most daunting parts of it.

Most people use a solicitor to work through the legal aspects of their divorce but a Financial Planner can really help if your dissolution or financial situation is fairly complex. Needless to say, the financial decisions you make at this time will impact the rest of your life so its important to get the right type of advice at the outset. Handling things on your own can cause you to overlook things, but the appointment of an experienced Financial Planner means that you will be able to explore and be advised on all of the financial options available to you.

In this article, we present some of the key financial aspects of divorce that you need to think about and suggest some common mistakes to avoid.

Immediate Financial Aspects of Divorce to Consider

Naturally after a separation, the immediate financial concern is figuring out how to stay afloat. This is a very unpleasant time, as you go into survival mode. Can you afford to pay your bills, and will you be able to avoid falling into debt with some careful budgeting?

Your prime focus will be the need to provide financial stability for yourself and any dependents you are responsible for. Avoid making any drastic banking decisions such as switching to another provider, especially if you have not agreed this with your former partner.

Money is often tight after a separation, and it’s important that you do not fall into debt. Moreover, it’s crucial that you protect yourself as much as possible from the effects of your former partner falling into debt. As you will still be legally married at this point, this debt certainly will affect you.

If your spouse is the sole name on the mortgage for the family home, then you might want to consider registering a Notice or Restriction. You have a legal right to live there, and this helps in preventing your spouse from taking the unilateral decision to remortgage or sell the home.

Considering the Family Home

One of the trickiest aspects of any divorce is figuring out what to do with the marital home.

It might be in your children’s interests and in your interests, for one of the adults to remain living in the property. However, this might actually be a hindrance to you in terms of moving on with your life.

You also need to consider whether keeping the family home is the most sensible financial decision. Depending on your circumstances, it might make sense to stay put. In many cases, however, the more rational option is to move somewhere more affordable.

You will be faced with monumental, highly-emotional decisions. However, in our experience, we can help clients to bring a lot of clarity to this difficult situation. Indeed, many clients have contacted FAS after their marriage dissolution, thanking us for raising the question about the family home and for the guidance we have been able to provide and in helping them towards making a decision they might not have had the strength to carry out alone.

Other Important Areas of Divorce Planning

You are most likely to have marital assets other than your home which you will need to plan accordingly after a separation.

This is a key time for you to review your assets thoroughly with the help of an experienced Financial Planner. At FAS, we can help you establish what your assets actually are, where they are located and whether these are still appropriate for you, given your dramatic change in circumstances.

For instance, some common questions our Financial Planners present to clients include:

  • Has your attitude to investment risk changed since change in circumstances?
  • Is it now appropriate or sensible to keep your Buy-to-Let property?
  • Do you need assistance with any existing pension arrangements or Pension Sharing Orders?

Pensions may or may not need to be divided following your Divorce. It depends on your particular situation. In light of this, working with a suitably qualified Financial Planner can help you look at how this affects your own retirement planning.

Financial Mistakes to Avoid During Divorce

 

Focusing on the home and neglecting other areas.

Many people become highly attached to the family home during Divorce, especially where children are involved.

This can often lead to many taking over the mortgage borrowing during a divorce settlement in order to keep the family home but at the expense of losing a proportion of their spouse’s pension. In most cases, it is better to sell the marital home, buy something smaller, and take a slice of the former partner’s pension. Of course, this isn’t the right choice for everyone, which is why seeking the right guidance is essential.

 

Accepting an equal pension split

Whilst equally splitting your partner’s pension provision might seem the fairest course of action, you should carefully consider this option before agreeing to it. This will not necessarily result in an equal level of income in retirement. Quite often, it is better to push for an equal income share, rather than a simple 50:50 split of the capital so discussing options with a Financial Planner makes sense.

 

Failing to check valuations

This is where our Financial Planners often provide the most value during a client’s Divorce. Both spouses are legally required to disclose all their assets during Divorce, including businesses and pensions. However, these two areas are quite complex and it is possible to conceal actual values. A Financial Planner who is experienced in this field will be able to help you obtain the relevant documents you need in order to value these assets, ensuring you get a fairer deal in the final settlement.

Nov 28
0
wooden path on beach pebbles

A Short Guide to Funding Long Term Care

By | Financial Planning

The demographic map of the UK is changing. Most of us are now living longer; in 2017 those aged 85+ were 1.35m in number, and this figure could reach 2m by 2031. Although this is wonderful news in many ways (more time with our loved ones!), it also brings significant challenges when it comes to financial planning.

First of all, it implies that people’s retirement funds will need to stretch further compared to previous generations. In 1980, for instance, an Englishman aged 65 had a 1/1000 chance of reaching 100 years old. Today (nearly 40 years later), those odds have shrunk to around 1/100.

This increased longevity is likely to put additional strain on the already overstretched State Pension and is one of the reasons why most employers are no longer offering employees Defined Benefit pensions (which pay a guaranteed lifetime income in retirement). Careful financial planning will, therefore, be needed more than ever to ensure we have the income we need in our later years.

Secondly, increasing life expectancy is also projected to accompany an increase in health problems amongst older people. In particular, research shows that the number of retired people with diabetes, depression, cancer and dementia is likely to at least double by 2035. Many of these conditions require some level of professional care, which come at a significant cost.

Given these trends, projections and figures, it is little wonder that at FAS we are often asked about what people can do to prepare for the possible costs of their future long-term care. In this short guide, we’ll be sharing some of our thoughts on this important subject. If you want to discuss your care strategy with one of our experienced financial planners, please do give us a call.

The Cost of Care

In 2019-20, the precise amount you pay for care depends on a range of factors including:

    Where you live in the country.
    The level of care you need (e.g. 24/7 intensive or temporary and residential).
    The quality of the care home in question.
    Your financial situation.

At the moment, there are around 400,000 people living in care homes across the UK; a figure which is set to rise to 1.2m by 2040. Residential care costs can vary greatly, but typically range from £600-£900 per week. Indeed, some people face annual care costs exceeding £50,000.

Ways to Fund it

£50,000 and similar figures are clearly eye-watering for most people to look at. After all, just 3-years in residential care could cost £150,000; enough to wipe out a significant portion of an Estate, and by extension a family’s Inheritance. How, then, can you prepare your finances for this large, yet unpredictable cost in the future?

In 2019-20, those possessing less than £23,250 in assets are entitled to financial support from their local council, to help cover the fees. If you (or a dependent, child or spouse/partner) continue living at home whilst you receive care, then the value of your house is not normally counted within the means-test determining whether you are eligible for council support.

We do not recommend that you deliberately deprive yourself of assets in order to try and get around this system. Not only does this leave you financially vulnerable, but the council is also likely to detect such deprivation strategies and calculate your care fees as if you still owned the home/assets you have sold or given away.

What, then, are some of the other options you can consider with your financial planner when it comes to creating a strategy for long-term care funding?

Own Income & Family

Some people are in the fortunate position where their siblings, children or other loved ones can contribute towards the costs of their care. This, combined with your own pension income as well as other savings and investments, could be enough to meet your care costs.

Property

Many people are cash-poor but asset-rich by owning a property. In such circumstances, downsizing or Equity Release could be an option to access funds needed to cover care costs. These are hugely important financial decisions with far-reaching implications for your financial plan, so we recommend that you speak with a financial planner about any decision or strategy involving using your property to fund your long-term care costs. It might be that other, more appealing options are available to you.

Care/Immediate Needs Annuity

With the help of an experienced financial planner, it is possible to find a good insurance plan which can help you meet your care costs. These plans usually involve paying a company a one-off lump sum in exchange for a guaranteed lifetime income (tax-free), which would be paid directly to your care home. The amount you pay for the annuity will vary depending on factors such as your age and health.

Invitation

Many commentators have described the UK’s care system as in a state of “crisis”, and many people are understandably worried about how they will cover these possible future costs. However, at FAS we can help you can assess your options with a clear mind and with the best information available.

This content is for information purposes only.

Sep 23
1
plant growing in some coins

What Is Ethical Investing?

By | Investments

It’s probably fair to say that in 2019, environmentalism is moving increasingly into mainstream public consciousness. People are now more concerned about how their behaviour, habits and even investments are impacting on the planet. To note just a few developments:

    David Attenborough released his “Climate Change: The Facts” documentary earlier this year, which had a huge impact on bringing the topic to the fore in public discussions.
    Extinction Rebellion (an activist movement advocating rapid, far-reaching measures to combat climate change) has run protests and rallies across the country, throughout the year, to raise awareness and influence politicians on climate change.
    More and more celebrities (such as Prince Harry) are being scrutinised by the media over their use of private jets, due to the carbon footprint they produce.

Whilst opinions may vary on the above events, demonstrations and productions in question, undoubtedly more British people are coming to accept the broad scientific consensus about humanity’s impact on climate change, and want to do something about it. Indeed, many are even asking how their money and investments can be put to responsible use in this regard.

This is where our Financial Planners can often start to talk about ethical investing with certain clients. Other broad, related categories on this subject include “ESG investing” (Environmental, Social & Governance) and “social impact investing”.

Here, we’ll be outlining what “ESG investing” looks like and what it tends to involve. Please note that this content is for information and inspiration purposes only. It should not be taken as investment advice or financial advice.

What Is ESG Investing?

There is no doubt that different companies have a varying impact on the planet and human society. A financial planning business such as FAS, for instance, is a service-based business. It does not have a supply-chain in the same way as a car manufacturer. Whilst both companies will produce a carbon footprint, the latter is likely to have a much greater direct impact on the environment due to the size of the business and the nature of their core product.

ESG investing is an approach to investing which factors in the impact of different companies and other assets upon our physical environment, such as their approach to pollution and consumption of natural resources. It also factors in the governance of these companies (e.g. their approach to anti-corruption and gender diversity on the company board), as well as their impact on the society they inhabit (e.g. wage fairness and corporate social responsibility).

Is ESG Investing New?

It might surprise you to learn that ESG investing was quite a “fringe” approach to investing until recent years, as investor demands have brought it increasingly into the mainstream of investment management solutions.

There are many reasons for this, but among them include the fact that investor demographics are shifting. “Millennials” are growing as a target market of investment firms, and this group, in particular, tends to be very environmentally-conscious.

There is also the fact that many companies themselves have experienced considerable internal change with regards to beliefs about their ESG profile, as mounting evidence about climate change has accumulated over time.

There is also now increasing evidence to suggest that, with a viable strategy, ESG investments can offer investors attractive returns. This is gradually supplanting a common, previous belief widespread in the sector that ESG generally provides lower returns than non-ESG investments.

How Do I Start ESG Investing?

The important thing to recognise with ESG investing is that it is broadly intended to achieve two primary goals, simultaneously:

1/. Meaningful returns for the investor;
2/. Positive impact on the environment, governance and society.

To a degree, these two goals are in constant tension. Sometimes investors are tempted to sacrifice investment performance in the hopes of producing a positive sustainable impact. Whilst this is noble, it achieves little for your financial goals to lose money over the long term. Investing and charitable giving are called two different things for a reason.

On the other hand, there is also the temptation for investors (and fund managers) to chase after investment opportunities with a poor or dubious ESG profile, but which might offer more attractive potential returns. The more you go down this road, the more you dilute the definition of ESG and eradicate the second goal, above.

A good Independent Financial Planner will be able to help you navigate the world of ESG investing carefully with these two goals (as well as your own financial goals) in mind.

For some people, they might want to reconstruct an existing investment portfolio gradually, to include more ESG investments over time. This can help to reduce instability and risk in the portfolio, although some people might find such an approach in tension with their conscience.

Other people reading this article might be nearer the beginning of their investing journey and would like help setting up a portfolio which reflects their “ESG values” to a high degree, from the very outset. One of the challenges here will be establishing your financial goals and selecting an appropriate range of investments which can be justifiably labelled as “ESG”, and which also achieve an appropriate level of diversification, risk-minimisation and potential of return.

Final Thoughts

We have only managed to scratch the surface of ESG investing here in this article. However, we hope it has given you enough information to inspire you and help gather your thoughts on this increasingly important topic.

We understand some people will want to act quickly out of intentions to “make a difference”. Whilst this is completely understandable and noble, it is also important to look after yourself – and your loved ones – by not putting your capital at unnecessary risk.

If you are interested in discussing an ESG investment strategy with us, please do get in touch.

Sep 23
0
safety rings in water

Income Protection vs. Key Person Insurance: Which Do I Need?

By | Pensions

At a glance, Income Protection and Key Person Insurance might look like the same thing. After all, they both intend to help protect a business if someone falls seriously ill or is injured; although the latter safeguards against death, as well.

In broad terms, Key Person Insurance is designed to protect a company’s financial interests. Income Protection, however, is intended to look after an individual and their family (i.e. following a serious injury or diagnosis of illness, which prohibits the person from working).

In this short guide, we have provided a summary of the key similarities and differences between Income Protection and Key Person Insurance. We’ll also be suggesting some scenarios where either might be appropriate to consider.

Key Person Insurance

If you are a Director or an important stakeholder in a particular business, then you will likely want to consider the benefits of Key Person Insurance. Essentially, it is a type of insurance which helps to ensure the business has access to much-needed funds if a key person, shareholder or decision-maker dies.

Some insurance policies will offer Critical Illness Cover (CIC), which could provide an emergency lump sum to the business if a key person can suddenly no longer work due to certain illnesses or injuries. If you are considering adding CIC to a Key Person Insurance policy, then it is important to check the details carefully with one of our Financial Planners. Certain illnesses and injuries might not be covered under different policies. You might need to balance the premiums of the policy with its conditions, as comprehensive policies are likely to be more costly.

Please speak to us about the tax implications of a Key Person Insurance policy. For instance, if you take out a policy for “business continuity purposes” then you should be able to treat the insurance premiums as a tax-deductible business expense. If, however, you are thinking about using Key Person Insurance to protect a loan, then the policy will likely not qualify as “tax-deductible”.

Key Person Insurance can be used to achieve a range of goals, including:

    Repay loans which might need settling.
    Providing funds to help close the business in a methodical, non-chaotic way.
    Open up a financial “safety net” to mitigate against a possible loss of profits.
    Supply funds for staff training and recruitment purposes.
    Provide much-needed funds for projects and developments.

Income Protection

As mentioned above, Income Protection exists primarily to protect an individual and their family, should they find themselves no longer able to work due to injury or illness. Should this, unfortunately, happen to you, and you have taken out such a policy, then if you meet its conditions you should be entitled to up to 80% of your pre-incapacity salary.

Sometimes a business will pay for an employee’s policy (e.g. a Company Director). In which case, this is usually called “Executive Income Protection” or EIP. Similar to Key Person Insurance, EIP can be treated as a tax-deductible business expense.

It’s worth noting, however, that if the policy’s conditions are met then the benefits are paid directly to the business, not to the individual. This means that when the company then distributes this post-incapacity, replacement remuneration to the employee, it will be subject to tax. So, it’s worth running this by us to ascertain the best way to distribute this in a tax-efficient manner.

In many cases, an individual will simply take out a policy themselves rather than a business taking it out on their behalf. Income Protection can be an attractive option for self-employed people, who typically do not otherwise have a means of attaining “sick pay” (since they have no employer to pay it).

Bear in mind that these self-funded policies are not tax-deductible, since you will likely be paying for the premiums using post-tax income. The good news, however, is that the benefits you receive from the Income Protection policy are usually exempt from tax.

Final Thoughts

Many businesses recognise the value of certain types of insurance to protect their assets and future growth prospects. Public Liability Insurance, for instance, is crucial for protecting your business against compensation claims levelled against you by customers. Employers’ Liability Insurance will help to cover you if such claims emanate from your staff.

However, as many as 3/5 small businesses in the UK admit to having no succession plan. Nearly 90% of the UK’s registered companies comprise businesses which employ fewer than 5 people, which are especially vulnerable if a key person was suddenly removed from the picture. This vulnerability, in turn, can hold businesses back due to investor reluctance or maintaining lines of credit.

If you are considering Key Person Insurance or Income Protection as a possible solution to your needs, then act swiftly. According to the ONS, a 35-year-old man has a 1/62 chance of dying within the next ten years. By the age 45, the chances change to 1/29 and by age 55, the chances are 1/12.

At FAS, we offer financial planning and advice on a wide range of business and income protection solutions. If you are interested in exploring your options, please do give us a call.

Sep 23
0

A Short Pension Guide for Your Grandchildren

By | Pensions

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.