Did you know that if you save £3,600 gross per annum into a pension for a new-born until they were 18 and then left it to grow? At 60 they could have a pot of nearly £800,000! 

Creating a legacy for future generations crops up a lot when planning with clients. What is the best way to help with school fees? Can lump sums given for house deposits or even a business start-up be tax efficient? Each of these questions could be a blog on their own and sometimes it is the simple things that have the greatest impact.

Yesterday I was helping my client write a financial “wish list”. Iris* wants to be able to continue to go on three holidays a year and to continue to be a member at her local sports club. Finally (and most importantly) she wants to know that she can afford a “nice care home on the south coast”.

However, I could tell that something else was on her mind. She looked at me and said “it’s probably not possible”. I pushed her for more details. She ideally would like to not worry about her grandchildren’s future. She was concerned about her three grandchildren and how they would be looked after at her age – Iris is in her early 80’s. All three of them are in their late 20’s. Two are married (one with a child) and all are struggling to make their mark on the property ladder. They are all so focused on moving up or getting on to the property ladder and this means that they are all neglecting their retirement planning. Which is understandable.

It’s not a secret that the current working population are not doing enough for their retirement. Defined benefit pension scheme are so rare now and it is often reported that automatic enrolment into pensions is giving people a false sense of security. Contributing for your children or grandchildren into a pension can have benefits today but also way into the future.

The Upside for Iris

  • Her estate will reduce and she could as a consequence pay less inheritance tax
  • The grandkids are not allowed to touch the pot under current rules until they are at least 55 but this is set to increase.
  • She could even contribute to her new born great grandchild’s pension by £2,880 net per annum
  • As long as Iris can prove she has surplus income and is paying it from income rather than assets, then potentially the whole lot would not be in her estate for the next 7 years.

The Upside for her Grandkids

  • The pension contribution is boosted by 25% due to initial tax relief
  • If they are high rate or higher rate tax payers this can be increased even further
  • The grows tax efficiently
  • They benefit from the effect of compounding by having their money invested for a longer period of time

The Maths

If Iris contributes £2,880 per annum to her great grandchild’s pension, this is immediately increased to £3,600 via tax relief. If this continues for the next 18 years with 5% (excluding charges) growth there will be £101,276.58. Even if no more contributions are added and the fund continues to grow at 5% on the baby’s 60th birthday the fund will be worth £786,067.08.

AMAZING!! But the juicy bit is still to come!!

The baby’s mother Faye* earns £53,750 and is caught in the child benefit trap. This is where your child benefits are reduced if you earn between £50,000 and £60,000 per annum. Child benefit is then stopped if you earn over £60,000. If Iris pays in £3,000 into Faye’s pension, then the basic rate tax relief that it will receive takes it to £3,750. The impact that this has on her income is that it takes her out of the child benefit trap. An extra £1,687pa will be received in total per annum into Faye’s pocket.

So it seems to me that it is possible to help Iris to stop worrying, but most importantly Faye is better off at a time when she needs the money the most and Iris is also doing some inheritance tax planning. The new born baby isn’t doing too badly either!!

WARNING – the figures have been chosen for their simplicity rather than based on truthful events. Before tackling this type of planning, please get independent financial advice.

*names not correct and details changed for the case study

Lots of love,

Miss Lolly xx
Smart Financial Advice for Women

Whether you need help with mortgages, investing, saving for a rainy day, or just tackling your financial fears, Miss Lolly will give you unbiased advice based on the very latest financial wisdom. No jargon, no lectures – just the vital stuff you need to know, in user-friendly language. Get in touch via her website.

About The Author

Financial Adviser

After 8 years in her profession, the financial adviser behind Miss Lolly realised that most households, no matter what their income, face very similar dilemmas when it comes to money. Everyone wants the “good night’s sleep” that comes with knowing that everything is on track but very few actually take action and put a plan in place and seek good, regular advice. The main barrier is fear! Fear of not understanding, fear of not having enough money and most importantly fear of opening your eyes to the current financial situation. “The motivation to set up Miss Lolly came when I fell pregnant and started to think more seriously about my own financial future. I realised how lucky I am to have the knowledge and tools to put in place everything I need to ensure that my new family will be financially secure. I also noticed that a few hints and tips are all most clients need to restore their confidence to tackle their day to day finances by themselves. When helping clients with their financial foundations, I was being asked very similar questions, so thought it would be useful to share some of the advice that I give them.” By day Miss Lolly is a financial adviser at a wealth management firm in the City of London. She is a Chartered Independent Financial Adviser and also a Fellow of the Personal Finance Society (PFS). This is the highest qualification a financial adviser can hold and less than 2% of PFS members have reached this. Miss Lolly is also a member of MENSA – the high IQ Society with an IQ of 148. In her spare time, Miss Lolly enjoys socialising with her friends, trying out new restaurants, keeping fit and playing Sudoku. She lives in South West London with her husband and is the proud mum of two children.

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