Parents and grandparents can create a substantial nest egg for their children, with minimal effort, by being clever with their tax planning. By starting a stakeholder pension fund for each of your children and paying in an amount each month, even though they are not taxpayers, there is considerable tax relief available.
That’s the top tip from Whitley Stimpson Ltd, one of the largest independent accountancy practices in the area, with offices in Banbury, Bicester, High Wycombe and Witney.
Contributions could create a nest egg of over £1 million by their 43rd birthday, based on recent research, and after that investment returns do the rest.
Tax expert Owen Kyffin, director of Whitley Stimpson, explains: “You could start a stakeholder pension fund for each of your children and pay in £240 per month for them. This comes to £2,880 being invested for them each year. Then, even though they are not taxpayers, there is tax relief in the form of a top up from HMRC of £720, bringing the total amount invested for them each year up to £3,600. That’s already a 20% return on your investment for very little effort.”
A pension won’t help if your child is going to have a more immediate cash need, as once in the scheme they cannot get access to the funds until they are 55. Nevertheless, once they turn 55, they can take 25% of it tax free.
Instigating a pension for your child could help set them up for a wealthier retirement, and whilst not only being tax efficient, will help introduce them to the concept of long-term saving.
Owen says: ”Even if families pay in £50 or £100 a month this could create a pot of £212,883 and £425,766 respectively (again assuming 8 per cent a year growth rate and net of fees). This could be an attractive thing for grandparents to get involved in as parents might need to be saving for their own pension. Grandparents, godparents and even family friends can also gift unlimited amounts from excess income, free of any inheritance tax risk.”
Cash drip fed into a pension at an early stage could work harder than if it was handed down as an inherited lump sum.
Owen concludes: “These are not simple calculations, which is why those considering it should talk to the experts. The simple message is, if you are unsure about tax planning, we have a fully qualified team of people here to advise you. We’ll help you and your family plan for the future whilst keeping enough money in your pockets for now.”
For advice on your specific situation please contact Owen on 01295 220914 or firstname.lastname@example.org.