Three ways a pension could benefit your child

From leaving your pot to starting their own, here are three ways a pension could provide financial security for the future generations of your family.

As a parent it’s only natural to think about how you’ll be able to help your children, or grandchildren, financially as they get older. From investing in property to opening a bank or savings account, there are some well-known ways to start building a nest egg for their future. Yet, did you know a pension could also provide future generations of your family with financial security?

1. You could leave your pension to your child

While you have been busy building your pot for many decades, you might find that you don’t spend it all before you die. And leaving a pension, whether all or part of it, to your off-spring could be very tax-efficient. This is because most pensions are not considered part of a person’s estate so are exempt from inheritance tax.

If you die before the age of 75 your beneficiaries will not pay any income tax when they withdraw money from the pension.

The facts you need to know

If you have a defined contribution scheme, such as a personal or workplace pension, you can leave this to your child. It doesn’t matter if you are yet to take any money, you’ve taken some of your pension (such as tax-free cash) or you’re in drawdown. Your pension must be in a flexi-access drawdown fund when you die for you to be able to pass this type of scheme on.

Your chosen beneficiary won’t have to wait until they are 55 to access your pot. They can take all of the money at once as a lump sum, receive regular monthly payments or make one off withdrawals as and when. And there are some circumstances where they won’t have to pay any tax at all on any money they take:

  • If you die before the age of 75: your beneficiaries will not pay any income tax when they withdraw money from the pension
  • If you die after the age of 75: your beneficiaries will pay their own marginal rate of income tax on any withdrawals they make

The rules are a little different with a defined benefit (final salary) scheme. These types of pensions can usually only be left to a dependent of the person who died – so a spouse, civil partner or child under 23. The scheme may allow it to be paid to someone else, but it could be taxed by up to 55% as an unauthorised payment.

Other things to consider

Your pension is not covered in your will. If you have multiple or old pensions it is wise to track these down and update your chosen beneficiary with each provider. If you divorce, change partners or re-marry you will need to remember to get in touch with Pension Egg or your current pension provider to update your beneficiary.

And if you’ve already combined or transferred your pots with Pension Egg, you will have completed a death beneficiary form to confirm who you would like to leave your pension to. Not sure if you’ve completed your form or want to update the details your previously provided? Get in touch.

2. You could start a pension in your child’s name

A pension might not be the obvious trust fund of choice. Yet, the long-term benefits of opening this type of savings account for your child is hard to ignore. The investments you make have decades to grow. And thanks to compound interest, paying in even a small amount every month could mean a tidy sum for the future.

Paying in £50 a month from your child’s 5th to 55th birthday could see a tidy sum accumulate of over £150,000 in their pot.

Yet, pay in that same amount from their 35th birthday and they could end up with seven times less in their pot1. Much like your own pension, the sooner you start paying in, the longer your child’s pension will have to grow.

At 18, the ownership of the pension would transfer to your child. They will then be able to start making contributions themselves, or you can continue to top up the pot. You’ll be able to pay in up to £3,600 a year inclusive of tax relief.

With their savings locked away until they turn 55, this isn’t the right type of savings account for short-term saving goals such as university fees or first cars. Yet, what better way to start teaching children the importance of saving for their future than with a pension. One that someday they might be able to leave to their own family.

3. You could access some of your pension from 55

Did you know that from 55 you have flexibility around what you could choose to do with your pension? And with the right type of scheme, that could include taking a tax-free lump sum. Some people may then choose to use this tax-free cash to help out family.

Taking money early from your pension might not be right for you though, as it could leave you with less to live on than you need; it shouldn’t be seen as an easy way to raise money. If your retirement savings are already managed by Pension Egg, you’ll have on-going access to financial advice to guide you through making any big decisions.

A bigger pension: for you and for them

We firmly believe the size of your pension matters. And having the ability to leave some of your pot behind, or access your pot should you need to, could make all the difference to your loved ones.

The best way to find out how you could use your pension to support your family is to speak with a regulated financial adviser. A pension might not seem obvious, yet it could mean one less thing to worry about as your family grows.

All our opinions as to taxation and related matters are based upon our understanding of the current tax law and practice of HMRC, which is subject to change. Tax treatment depends on your circumstances.

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24 Dec, 2020
Katie Day
Pensions