Q- Is it possible to set up a pension arrangement for a family member? My son is currently at university and we want to start saving for his future. ES Belfast
Answer: Yes it is. Whether or not you have earned income you can invest in a pension plan - therefore payments can be made into a pension plan for a child, student, or non working spouse/partner of up to £3,600 per year and you benefit from tax relief on the payments.
Whenever we set up pensions or saving plans for clients we stress that there are 3 important factors to consider:
The amount which you can comfortably afford to save;
The length of time over which you can afford to make contributions, and;
The performance of the underlying investment fund.
Advantages of pension funds
- Pension contributions attract tax relief. If you pay £80 to the pension the government help you save by giving an additional 20% tax relief. The contribution is therefore grossed up to £100.
- The pension fund grows free of tax (apart from the withholding tax on dividend payments by UK companies) and this additional efficiency helps the fund grow quicker than other investments.
- This is a controlled form of saving which your son cannot access until he is 55.
- You can make the payments now and then your son can either make additional payments or take over the payments when he has sufficient disposable income.
- When your son wants to get access to the fund,at earliest age 55, they can take up to 25% of the fund value as a Pension Commencement Lump Sum. The rest of the fund is used to provide a regular income.
- If your estate is exposed to Inheritance Tax “IHT”, which is levied at 40% on the total value of your estate, you can utilise your annual exemption of £3,000 by making a pension contribution. There is a double tax benefit in this case as your son’s pension fund, if you make the maximum contribution of £2,880 net of tax, receives £720 of tax relief, increasing the contribution to £3,600 and you shelter the pension payment from a potential IHT charge of 40%.
- If you make a pension contribution, after the cancellation period has expired you cannot get the payment back
- The beneficiary of the pension cannot access pension benefits before the government’s specified minimum age, which from 2010 will be 55.
- The level of tax benefits may change in the future – although given the large savings gap in the UK and the government’s wish to make us less reliant on the state, the relief should continue.
Personally, I think it’s a great way to pass wealth down to your child, receive great tax benefits, and control your son’s access to the wealth. You really are saving for your son’s future.
Send your questions to: email@example.com. We will answer as many queries as possible but regret we cannot enter into individual correspondence.
Keith Storey is a Director in ASM Horwath. He is experienced in providing advice to both private and corporate clients. His areas of expertise include pre and post retirement planning, developing individual investment strategies, inheritance tax planning, and life and illness protection plans. ASM Horwath, 20 Rosemary Street, Belfast BT1 1QD (NI 37083) is a company registered in Northern Ireland and is authorised and regulated by the Financial Services Authority, FSA registered number 193758.
Alan Curry is Director of Tax at ASM Horwath. He is a member of both the Institute of Chartered Accountants in Ireland and the Chartered Institute of Tax and his areas of expertise include tax compliance & planning, employment & personal tax, VAT, trusts & estates, retirement planning, inheritance tax, divorce & separation, and capital taxes planning.
Alan and Keith can be contacted at tel: 028 9024 9222.
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