Child Taxation: 12. Use Adult Pensions

If you are a parent of grandparent, another efficient way to save for children or grandchildren is to save extra monies in your own pension scheme.

If you are Working:

You (and your employer) can pay into pension schemes each year the equivalent of the lower of your annual salary or £40,000pa (pension annual allowance).  E.g. If you earn £70,000pa, the maximum you/employer can pay into pensions in £40,000pa.  If you earn £25,000pa the maximum you/employer can pay into pensions is £25,000pa.

If you are Not Working/Retired:

The maximum you can pay into a pension is £3,600pa gross.

Either way, you get basic income tax relief 20% on your own contributions (with higher rate tax reclaimable usually via self assessment). This means for every £80 you pay into your personal pension, the government automatically add £20.

Even if you have triggered the money purchase annual allowance (MPAA) of £4,000pa by retiring or starting to draw the main benefits from your investment linked pensions, you still have room with the MPAA at £4,000pa and the not working retirement maximum pension contribution of £3,600pa.

Parents and Grandparents – Gift 25% Tax Free Cash

By investing in pensions and notionally earmarking for a child, when you reach 55 or 57 (after 2028), you can withdraw the tax free cash sum of 25% that you may have set aside to pay for university, weddings, cars, house deposits etc and balance of 75% is then your own pension fund to deliver income or drawdown capital when needed.

Children/Grandchildren Inherit Pension Fund

If you don’t need it, you could even name children or grandchildren as beneficiaries under an ‘expression of wishes’ for them to inherit the fund on your death.  If you die prematurely i.e. before age 75, they would inherit the pension fund tax free.  If you die after age 75, they would inherit the pension fund but pay taxes at their normal rates of tax when they draw down on the fund.