Did you know that you can contribute to someone else’s pension? This can be a smart strategy for individuals who have already maximized their own pension contributions or for those who want to help a spouse, child, or grandchild build their retirement savings. Contributing to a loved one’s pension not only boosts their financial security but can also offer valuable tax relief.
How Does Contributing to a Pension Work?
Generally, pension contributions are limited to 100% of an individual’s earnings, up to a maximum of £60,000 annually. However, if the person you wish to contribute for does not have earnings, such as a spouse who isn’t working, they can still receive contributions up to £3,600 per year. It’s important to note that the total contributions, including those made by others, must not exceed these limits.
When you contribute to someone else’s pension, they can benefit from tax relief at their applicable rate. Everyone receives an automatic 20% tax relief, and higher-rate taxpayers can claim additional tax relief through a self-assessment tax return.
Example 1: Helping a Spouse
Let’s say you’ve already reached the £60,000 pension contribution limit for the tax year, but your spouse is not working. They can still receive up to £3,600 in contributions. You could contribute £2,880, and your spouse would receive £720 in tax relief, bringing the total contribution to £3,600.
Example 2: Supporting a Child or Grandchild’s Pension
You can also help your child or grandchild save for retirement by contributing to their pension. If you and your spouse have £6,000 available to give them (within the annual gift allowance of £3,000 per person), this amount can be paid into their pension. The child or grandchild will receive £1,500 in tax relief. If they are a higher-rate taxpayer, they can reclaim additional tax relief through self-assessment.
The Benefits of Investing Early
One of the most effective ways to build wealth is by starting to invest early. The earlier you begin contributing to a pension, the more your money can grow through compound interest. Starting early gives family members a significant advantage, helping them accumulate more wealth over time, as their pension pot grows.
By contributing to a pension at a young age, you help set the stage for a financially secure retirement while also taking advantage of the tax relief benefits.
Considerations to Keep in Mind
Gifts and Pension Contributions
When contributing to a family member’s pension, it’s essential to consider the tax implications of your gift. Small contributions may fall under the “gifts from normal expenditure” rule, meaning they may not be subject to inheritance tax if they are part of your regular spending and don’t reduce your standard of living. However, larger gifts could be classified as Potentially Exempt Transfers (PETs), which might be subject to inheritance tax if you pass away within seven years of making the gift.
It’s important to seek professional advice to understand the tax rules that apply to your contributions and how they might affect your overall financial plan.
Will the Pension Provider Accept the Contribution?
Not all pension providers accept contributions from third parties. Before making a contribution, check with the pension provider to ensure that they allow external contributions. Many providers accept third-party contributions if the donor already holds an account with them, making it easier to transfer the funds. If the provider does not allow third-party contributions, you may need to gift the money directly to the family member, who can then make the contribution themselves.
Pension Access
Remember, pensions cannot be accessed until the pension holder reaches the age of 57 (this will rise to 57 in 2028). Additionally, once a gift is made into a pension, it is irreversible, meaning the donor loses control over the money.
Conclusion
Contributing to a family member’s pension is a powerful way to help them secure their financial future. Whether you’re helping a spouse who isn’t working or assisting your children or grandchildren with their retirement savings, making pension contributions can offer tax advantages and create lasting wealth. Be sure to consider the tax implications and consult a financial advisor to make the most of this strategy. With careful planning, you can make a significant impact on your loved ones’ financial security and help them build a strong foundation for retirement.
