Putting money to work earlier allows more time for savings to grow

Millennials are more bullish than any other generation about their retirement savings, a major new study has found[1]. But with time on their side, should they be doing more?

Almost two fifths (38%) of millennial investors (aged between 18 and 37) globally are very confident they are saving enough now so they won’t run out of money in their retirement. That is more than 29% for Generation X (aged between 38 and 50) and 21% for Baby Boomers (aged between 51 and 70).

Bucking a common myth

Millennials say they are saving on average 15.9% (including employer contributions) of their income (wages plus any other earnings) specifically for their retirement. That too is more than Gen Xers (14.7%) and Baby Boomers (13.7%).

The results of the study appear to buck a common myth that millennials aren’t doing enough to save for their retirement. On the contrary, millennials appear to be saving a reasonable amount for their retirement, which is encouraging.

Miracle of compounding

The one thing that millennials have on their side over older generations is time, with up to 40 years or more until they are due to retire. Putting their money to work earlier allows more time for their savings to grow. It could also mean less of a scramble in the latter part of their careers if they have to make up shortfalls.

By starting early, millennials benefit more from the miracle of compounding – or, as Einstein called it, ‘the eighth wonder of the world’. Compounding involves earning a return not only on your original savings but also on the accumulated interest, or returns, earned on your past savings. That is why total contributions should be less the earlier you start saving, because you can earn returns on returns over a longer period.

Factors to consider

There are, of course, other factors to consider. Returns are by no means guaranteed, and careers can fluctuate too. Still, millennials are doing more than most when it comes to saving for retirement.

GIS 2019 found that millennials are saving more than the average non-retired investor aged 38 and above in most (20 out of 32) of the locations in which they live. Belgium (+9.0%), Austria (+8.5%) and Portugal (+5.3%) were the three locations where the disparity was highest between what millennials and non-millennials were saving, on average.

Source data:
[1] Schroders Global Investor Study (GIS) 2019, gathered from views of more than 25,000 investors in 32 locations around the world.

What rising life expectancy could mean for you

We know that age is just a number, and for different people it means different things. It’s also a phrase used by some people who oppose age restrictions. In the UK, 65 years of age has traditionally been taken as the marker for the start of older age, most likely because it was the official retirement age for men and the age at which they could draw their State Pension.

No longer an official retirement age

In terms of working patterns, age 65 years as the start of older age is out of date. There is no longer an official retirement age, State Pension age is rising, and increasing numbers of people work past the age of 65 years.

People are also living longer, healthier lives according to the latest findings from the Office for National Statistics[1]. In 2018, a man aged 65 could expect to live for another 18.6 years, while a woman could expect to live for 21 more years. So, on average, at age 65 years, women still have a quarter of their lives left to live and men just over one fifth.

Start of older age has shifted

An important further consideration is that age 65 years is not directly comparable over time; someone aged 65 years today has different characteristics, particularly in terms of their health and life expectancy, than someone the same age a century ago.

In a number of respects, it could be argued that the start of older age has shifted, but how might this be determined? Should we just move the threshold on a few years – is age 70 really the new age 65? Or, might there be a better way of determining the start of older age?

Population projected to continue to age

At a population level, ageing is measured by an increase in the number and proportion of those aged 65 years and over and an increase in median age (the age at which half the population is younger and half older).

On both of these measures, the population has aged and is projected to continue to age. In 2018, there were 11.9 million residents in Great Britain aged 65 years and over, representing 18% of the total population. This compares with the middle of the 20th century (1950) when there were 5.3 million people of this age, accounting for 10.8% of the population.

Oldest old are the fastest-growing age group

Looking ahead to the middle of this century, there are projected to be 17.7 million people aged 65 years and over (24.8% of the population). The oldest old are the fastest-growing age group, with the numbers of those aged 85 years and over projected to double from 1.6 million in 2018 to 3.6 million by 2050 (5% of the population).
The balance of older and younger people in the population has also tipped more towards older people, reflected in a rising median age up from 34 years in 1950 to 40 years in 2018. By the middle of this century, it is projected that median age will reach 43 years.

Source data:
[1] Office for National Statistics – November 2019

Planning ahead helps ensure that you’re on track

You work hard to enjoy your current lifestyle, but are you doing enough to ensure that you will continue to enjoy it in retirement? Many of us live for today, but saving into a private pension plan can help you retire sooner rather than later.

The term ‘private pension’ covers both workplace pensions (also known as ‘occupational’ or ‘company’ schemes), arranged by your employer; and ‘personal pensions’, which you manage yourself. There is no restriction on how many pensions you can have, and some people will have both.

Am I still saving enough for retirement according to my current circumstances?

Private pensions, often referred to as ‘personal pensions’, provide a way for you to save for retirement so that you’ll have an income to supplement the amount you’ll receive from the State Pension.

They are generally ‘defined contribution’ plans, which means any payments you make are invested. The amount you end up with at retirement depends not only on how much you’ve paid in, but also on how your investments have performed and the level of charges. We can assess your current retirement goals and calculate the target level of income you’ll require to achieve them.

Don’t forget: if you have a workplace private pension, both you and your employer will make contributions, boosting the amount you end up with at retirement.

Can I rely on the State Pension to provide a substantial income in retirement?

The State Pension is a regular income paid by the UK Government to people who have reached State Pension age. The State Pension changed on 6 April 2016. If you reached the State Pension age on or after this date, you’ll now be getting the new State Pension under the new rules.

The new State Pension is designed to be simpler than the old system. The new scheme pays up to £168.60 a week (as of 2019/20). It’s possible you may receive more or less than this amount.

To receive £168.60, you must have a National Insurance (NI) contributions record for 35 years. If not, the amount you receive will be proportionate. If you have less than 10 years’ NI contributions, you won’t receive any State Pension. You can pay more to make up for any shortfall in your NI contribution record.

You may receive less if you opted out of the additional State Pension scheme, or ‘SERPS’. This scheme ended in April 2016. If you were in a pension scheme or personal pension plan before this date, this may apply to you.

If you were entitled to a higher pension under the previous State Pension scheme, you’ll still receive this. If you don’t claim your State Pension in the year you reach State Pension age, it will be increased when you do take it. For each year you delay, it increases by almost 5.8%.

The State Pension is unlikely to provide a substantial income in retirement. That’s where a private pension can make a big difference.

Am I making the most of pension tax relief?

One major benefit of contributing to a pension is the boost your contributions will receive from tax relief. Pension providers can claim basic-rate tax relief at 20% on behalf of savers. So for every £80 you contribute, £100 will be invested into your pension. You receive tax relief on private pension contributions worth up to 100% of your annual earnings.

Tax relief is paid on your pension contributions at the highest rate of Income Tax you pay. If you’re a higher or additional-rate taxpayer, you must claim back the additional 20% or 25% on top of the basic 20% via your self-assessment tax return. If you don’t claim it, you won’t receive it.

Tax relief in England, Wales or Northern Ireland:

• Basic-rate taxpayers get 20% pension tax relief
• Higher-rate taxpayers can claim 40% pension tax relief
• Additional-rate taxpayers can claim 45% pension tax relief

In Scotland, Income Tax is banded differently, and pension tax relief is applied in a slightly alternative way:

• Starter-rate taxpayers pay 19% Income Tax but get 20% pension tax relief
• Basic-rate taxpayers pay 20% Income Tax and get 20% pension tax relief
• Intermediate-rate taxpayers pay 21% Income Tax and can claim 21% pension tax relief
• Higher-rate taxpayers pay 41% Income Tax and can claim 41% pension tax relief
• Top-rate taxpayers pay 46% Income Tax and can claim 46% pension tax relief

How much more should I be saving for retirement?

Generally speaking, the more you save, the more you can expect to get back. You can choose to save as much as you can afford. If you want to, you could save up to 100% of your earnings into your pension each tax year. However, there’s an upper limit on the amount that you can save into pensions each tax year.

This is known as the ‘annual allowance’, which is currently £40,000 in the 2019/20 tax year. If you go over this amount, a 40% tax charge will apply. Obtaining professional financial advice will ensure that you are contributing the correct amounts based on your retirement goals.

Will there be limits on the value of payouts from my pensions?

The lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.

But the regular contributions you and your employer make into pensions, plus the fact investments in pensions grow free of tax typically over a long time, can result in your pensions growing above the lifetime allowance.

The lifetime allowance for most people is £1,055,000 in the tax year 2019/20. It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension. The standard lifetime allowance is indexed annually in line with the Consumer Prices Index (CPI).

Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%, and any amount over your lifetime allowance that you take as a regular retirement income – for instance, by buying an annuity – attracts a lifetime allowance charge of 25%.

How can I make the most of my pension pot when I retire?

How long your pension pot lasts will depend on the choices you make. From age 55, there are three main ways you can take your money. You can take your tax-free money first, take a combination of tax-free and taxable money, or take a guaranteed income for life. You could also take a combination of these three, or simply do nothing at all.

Each of the main options usually allows you to take up to 25% of your pot tax-free. You might also need to pay tax on the remaining 75% of your pension pot, depending on your circumstances and the options you choose. Tax rules can also change in the future.

The ways to access your tax-free money, and the remainder of your pension pot, are very different on each of the options though.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

How to build wealth that stands the test of time

Long-term investments tend to be less risky in the end. By investing for the long term, you are committing to your investments, and history has shown that this strategy can pay off handsomely.

This is also often the best way to build wealth that stands the test of time. It’s how you plan for retirement and build a legacy to pass on to your children and grandchildren. But it’s important to keep your eye on long-term goals like retiring, paying for your child’s education and passing on some of your wealth to your family.

Regular saving as part of a long-term investment strategy offers a flexible, affordable solution for many people. And by keeping some of your wealth liquid in the form of cash deposits or short-term government securities, you should not be forced into realising investments at what might be an unfavourable time.

Long-term investment points to consider

1. Don’t disregard income

Investment is about more than capital growth. For your money to really grow, dividend income is key. The main benefit of reinvesting income from your investments is that it can be used to buy more shares or units within funds which have the potential to grow in value and boost your overall returns. Reinvesting income is essential to grow your portfolio. You will usually have the option of reinvesting all or a portion of your proceeds back into your original investments.

2. Take some risk

All investments involve some degree of risk. Differences include: how readily you can get your money when you need it, how fast your money will grow, and how safe your money will be. Risk isn’t always a bad thing, especially if you are looking for long-term rewards. Understanding risk means identifying your own attitude towards it and identifying the different types of risk. Rebalancing can also help to maintain the overall risk of a portfolio in line with your needs.

3. Balance change and constancy

Chasing trends at the expense of stability is not wise. The feeling that you’re missing out on a great performance can be very strong. Contrary to what the media may portray, you can do well – and reach your long-term investment goals – with a diversified approach that doesn’t require you to discover the latest investment fad. Resist this approach. The smart money has probably already moved on.

4. Don’t put all of your eggs in one basket

Diversification is key for successful long-term investing. Spreading your assets while focussing on long-term returns is generally a recipe for stock market success in any economic environment. It is not a case of investing large sums of money in one go, but investing wisely and consistently.

5. Invest regularly

Putting money into the stock market at regular intervals allows you to ride out stock market volatility. Drip-feeding money is the perfect solution if you want to invest but are unsure of when to do it, and it removes the uncertainty of putting a large sum of money into the market all at once. Remember, it is the time in the market that is by far the most important consideration, not any attempts at timing the market – a strategy fraught with danger.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Responding to situations rather than reacting to them

As the saying goes, ‘People don’t plan to fail, but they do fail to plan.’ To enable you to achieve want you want to, whether that’s trying to lose weight, getting fitter or securing that promotion, having a plan and being prepared for every eventuality is a great way to help move you closer towards your goals.

You can do almost anything when you feel confident about your finances. So how confident are you? No matter what your current age or financial situation, if you haven’t already started or you need to make improvements to your existing finances, the best time to start is right now. The financial plans you put in place today will lay the foundations for your and your family’s financial security and independence tomorrow.

Trying to get your attention

The truth is, though, some of us are better planners than others and some of us live for the now and spend in the moment. But somewhere out there, beyond the shiny feel-good of today, our future selves are waving their arms around trying to get our attention.

Being a good planner means you need to be more goal oriented and able to take control of your life. By planning ahead, you can then identify the associated risks, weigh and categorise them, prioritise and create a financial plan. In this way you can transform risks into opportunities and experience the rewards of taking them.

Increasing your net worth

Most people believe the key to wealth is a high-paying job. Yes, of course it’s easier to amass assets if you have more money coming in every month, but one key to increasing your net worth is to spend less than you make and then make it work really hard for you, and not someone else.

Thinking long term is an important characteristic of accumulating wealth and achieving financial independence. Being financially independent means that the income you generate from investments alone is enough to cover all your expenditure.

Having a sound financial plan

But without proper financial planning we are not ready to respond to challenges that life may throw our way. Hence we become reactive. Having a sound financial plan in place ahead helps us to become proactive.

By becoming proactive, we are then able to take the right action in the face of certain challenges and adversities. When you are proactive, you respond to situations rather than reacting to them.

Your destiny is now in your own hands

If you are in your 50s or 60s, your thoughts are probably turning towards retirement. When should you retire? How much money do you need?

In trying to answer these questions, you face a problem. Because of longevity trends, we are on average living longer. With longevity increasing, your wealth may have to provide you and your spouse or partner with an adequate income for 30 or even 40 years.

Britons aged 30 today have a 50% chance of living to more than 100, while 50-year-olds have an even chance of reaching 95[1]. Longer lifespans, however, raise financial challenges – for individuals as well as for families and society.

The idea of a retirement lasting many decades may seem appealing, but longer retirements mean more years of living off your pension and savings. Will yours be enough?

Extra benefit of compound interest

How much money you need to save depends on when you actually start saving and how much you want to save in total. The earlier you and potentially your employer (if they match your contributions) start adding to your pension pot, the less you will need to save each month because the cost is spread over a longer period.

Moreover, if you start saving earlier, your funds will accrue the extra benefit of compound interest throughout the duration of your savings. Making money from the interest means you can actively save less but still end up with the same amount.

Much more freedom and flexibility

The good news is that changes to pensions also now mean you have much more freedom and flexibility over how to take your benefits – whether as tax-free cash, buying an income for life, leaving your pension fund invested while drawing an income, or a combination of all these options.

Unless you believe the Government is likely to become more generous with the State Pension and other retirement benefits, individuals will almost certainly need to save more to enjoy the standard of living they would like in retirement.

Building a retirement nest egg

Over the last few decades, employer pensions have become generally less generous. Today, people starting a new job in the private sector are very rarely offered a traditional defined benefit pension – where the employer guarantees you a certain level of pension based on your salary and length of service.

Most employer-based pensions now depend on how much you and your employer have contributed and the investment returns achieved by that money. That said, for most people, saving via a workplace pension still remains the correct approach to take for building a retirement nest egg – not least because the employer contributions are effectively free money.

A number of attractive tax breaks

Importantly, pension savers benefit from a number of attractive tax breaks, including Income Tax relief on contributions and up to 25% of the proceeds being tax-free. For 2019/20, the annual limit on tax-relievable personal contributions is 100% of your salary (or £3,600 if more). In addition, there is a limit on tax-efficient pension funding called the ‘annual allowance’ (£40,000 for most people) – this applies to both contributions paid by you and contributions paid by your employer and, if exceeded, means you will pay tax on the excess (an annual allowance charge).

We’ll help keep track of your pension contributions so that you know if you’re getting close to your annual limits.

Maximum tax-free retirement savings

In some cases, we may be able to ask your pension provider to pay the charge from your pension benefits. You may not be subject to an annual allowance charge (or a lower charge may apply) if you have unused annual allowances from the previous three tax years that can be carried forward.

Increasingly, more people are also being caught by the ‘lifetime allowance’, which puts a limit on the total value of their pension funds that can be accumulated without suffering a tax charge. From 6 April this year, the pensions lifetime allowance increased to £1,055,000. The pension lifetime allowance is the maximum amount that you can accumulate in your pension plans without suffering a tax charge (lifetime allowance charge).

Source data:
[1] The 100 Year Life: Living and Working in an Age of Longevity, by Andrew Scott and Lynda Gratton, September 2018

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Creating plans of action to ensure you reach your financial goals

To be prepared for the road ahead, it’s critical to think about having a plan. For many people it’s not clear where their money will come from when they no longer receive a salary. And that can be stressful. When you add in the pressures of today’s bills and basic living costs, not to mention the nice things like holidays, the thought of the future can seem a bit overwhelming.

Planning for the future means making conscious decisions now. And even though we fill our lives with plans for our future selves, we’re always preoccupied with day-to-day events so we forget how important it is to take the time to take a step back and look to the bigger picture.
With our help, you can create a plan of action to ensure you reach your financial goals.

Will a plan really help me? Put simply, ‘yes’.

Where is my money going now?

The first step of your financial planning process is to determine your current financial situation in relation to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items will give you a clearer picture of where you stand financially. A monthly budget is an important step towards your financial fitness and should form the foundation of your financial planning process.

Have I built up a rainy day emergency fund?

The number one reason you should establish a rainy day fund is because, unfortunately, things unexpectedly do go wrong in life. So you also need to make sure you have an emergency fund and work towards saving six months worth of living expenses. This is money that you set aside for the unpredictable and unplanned and to cover expenses such as being made redundant or a sudden change in your income.

What are my financial goals in life?

Specific financial goals are vital to your financial planning. It’s time to consider now what matters to you. You need to decide what’s within reach, what will take a bit of time and what must be part of your longer-term strategy. Apply a SMART- goal strategy to this process. That is, make certain your ambitions are specific, measurable, achievable, relevant and timely. You should also periodically analyse your financial goals to make sure you’re always on track.

Have I prepared for unexpected events?

There are certain times when life-changing events happen. So it’s essential to protect both your and your family’s financial future. It may be difficult to think about, but if something were to happen to you or your partner, you’d want to know you are both protected financially. Think about how much money your family would need to maintain their current lifestyle if you weren’t around. This will give you a better idea of how much protection you need should different events occur – whether this is your ill-timed death, or suffering from an illness or disability.

What big moments do I need to plan for?

Life has a habit of surprising us, disrupting the best-laid financial plans. Having a plan will help you prepare for whatever comes your way, while saving for the things you care about. Whether it’s buying a property, starting a family, changing your career or life after you’ve finished work – whatever your vision for the future, having more money will help to make it rosier.

Are my financial plans still on track for success?

The financial planning process is dynamic and does not end when you take a particular action. You need to regularly reassess your financial decisions. Changing personal, social and economic factors may require more frequent assessments. When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help you make priority adjustments that will bring your financial goals and activities in line with your current life situation.

Source data:
[1] The research for Royal London was carried out by Research Without Barriers (RWB) between 12/04/2019 and 15/04/2019 amongst a sample of 1,012 UK adults who have been married and separated, divorced and/or widowed. All research conducted adheres to the MRS Code of Conduct (2014).
[2] There were 101,669 divorces in the UK in 2017, according to the ONS

Don’t miss out on this little-known tax rule

For those parents who have spare cash, putting money into their children’s pension will boost the retirement prospects of their offspring. The money will be topped up by the addition of tax relief and could also earn their children a tax refund if they are higher-rate taxpayers and reduce the penalty they face if they are a higher earner receiving child benefit.

Under current rules, there is nothing to stop a parent making a contribution into the pension of an adult child. With millions of younger workers having been newly enrolled into a workplace pension, many now have a pension for the first time but are only making very modest contributions.

Building a more meaningful retirement pot

An additional contribution from parents early in their working life, benefiting from compound interest as it grows, could help them to build a more meaningful retirement pot and is money that cannot be touched until later in life.

A campaign has been launched by Royal London to make parents aware of the ‘hidden advantages’ of paying into the pension pot of their adult children. It is a little known fact that a parent who puts money into their child’s pension could be doing them a favour three times over.

Improving long-term financial security

First, the recipient will get a boost to their retirement pot, including tax relief at the basic rate. Second, recipients who are higher-rate taxpayers can claim higher-rate tax relief on their parents’ contributions, which will increase their disposable income. And third, recipients affected by the high income child benefit charge can see this penalty reduced because of their parents’ generosity.

Not every parent has spare cash to pay in to their children’s pensions, but many will be in a better financial position than their children can expect to enjoy. By paying in to their children’s pension, they can give them a triple boost and improve their long-term financial security.

Recipient receives basic-rate tax relief

A little-known feature of the pensions system, however, is that the contribution by the parent is treated as if it had been made by the recipient. So, for example, if a parent pays £800 into their child’s personal pension, the recipient will get basic-rate tax relief on the contribution, taking the amount in the pot up to £1,000.

In addition, there are two further benefits to the recipient:

If the recipient is a higher-rate taxpayer, he or she can claim higher-rate relief on the contribution made by the parent; this would be done through the annual tax return process and would reduce the tax bill of the recipient.

If the recipient is affected by the ‘high income child benefit charge’ and is earning in the £50,000-£60,000 bracket or slightly above, the money contributed by the parent is deducted from their income before the high income child benefit charge is worked out, thereby reducing their tax charge; for example, if the recipient is earning £60,000 and therefore faces a child benefit tax charge of 100% of their child benefit amount, a pension contribution by the parent of £8,000 grossed up to £10,000 by tax relief would reduce the recipient’s income to £50,000 for purposes of the child benefit charge and would completely eliminate the tax charge.

Reducing a future inheritance tax bill

Apart from generally wanting to help their children, parents may be interested in this idea particularly because they may be up against their own annual limits for pension contributions and may therefore have spare cash. Contributions may reduce future Inheritance Tax bills if they qualify for one of the standard exemptions, such as regular gifts made from regular income.

The amount that the parent can contribute with the benefit of pension tax relief is not limited by the parent’s pension tax relief limit but by the limit that their children face – which in many cases will be up to their annual salary or £40,000, whichever is the lower.

Contributing money into a child’s pension

Parents can also contribute money into a child’s pension, which will reduce the size of their estate for Inheritance Tax purposes on death if a valid Inheritance Tax exemption applies or after seven years if there isn’t a valid exemption.

For example, the ‘normal expenditure from income exemption’, which is unlimited, would apply if the contributions are not at such a level so as to reduce the current standard of living of the parents and are made on a regular basis, such as an annual contribution from the parents’ regular income.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE
AND CAN GO DOWN, WHICH WOULD HAVE
AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.