Planning Financially for your family part 3

Start a pension and set your children up for retirement now 

While a child might not thank you for this gift now, they will in later life when they realise the true value of starting their pension at a young age. 

Non-taxpayers, including children, have an annual gross pension allowance of £3,600 with contributions still attracting 20% tax relief. This means a relative could invest up to £2,880 into a Junior Self-Invested Personal Pension (Junior SIPP) which is then topped by up with £720 from the government.

As with all pensions, returns accumulate free from tax – but of course the recipient would not be able to readily access the pot. Currently the minimum age is 55 but this is set to rise to 57 in April 2028.  

A sum of £2,880 invested every year in a Junior SIPP would mean total contributions of £64,800 over 18 years after the current government tax relief of £12,960 of 20% has been applied.

Were those contributions to grow by an annual compound growth rate of 5%, then at 18 the pension would be worth an impressive £107,619 .

Even if no further contributions were ever made after this age, the pension would be worth an estimated £919,780 by the age of 60 with an annual compound return of 5%!

Giving a child such a huge head start on their pension means they can focus on other financial needs such as raising a house deposit or paying for a wedding. 

For really large financial gifts, set up a trust 

A trust is a tax-efficient legal arrangement that allows assets of unlimited value to be held by a parent or grandparent as the trustee for the benefit of a child. The simplest trust of all is a bare trust, which allows the trustee to retain control of the assets with contributions able to grow tax-free. 

Unlike a Junior SIPP, the money can be accessed any time by the trustee, for example if they want to take out funds to pay for a school trip or private education. But there are some tax considerations too.

The child, for example, is liable for capital gains tax, although there is no tax to pay if the gains realised each year are less than the child’s allowance, which currently stands at £12,300.

Beware, however, that the CGT allowance will halve to £6,000 from April 2023 and halve again to £3,000 from April 2024.

Another consideration is that income from the trust will be taxed against the parent, so these are often more popular with other family members, such as grandparents. 

Because trusts can be complicated, those considering a trust with larger amounts of cash or multiple beneficiaries would be wise to consult a financial planner to ensure this is the most tax-efficient strategy for their gift.