Securing a Child’s Retirement Income

The number crunching makes it absolutely clear that the sooner anyone can get money into a pension, the better. However younger people (i.e. those aged 40 or less) seem to have little interest in retirement planning but perhaps moreover they may have limited funds to put towards this anyway.

Parents or Grandparents on the other hand are normally more appreciative of the need to save, to save early and with decent amounts. Statistics from the major pension providers show that pension contributions made on behalf of younger people by their parents or grandparents is negligible; the idea simply has not caught on. Yet any comparison of the figures shows the game changing nature of a sizable pension contribution made at a young age.

Look at a 21 year old who pays £10,000 per year into a pension for 4 years. This has the same buying power at age 65 as a 43 year old paying the same amount per year into a pension for the rest of their working life (to age 65).

So the 21 year old who makes this level of contribution no longer has to contemplate 22 years of saving at age 43 and beyond, unless of course they wish to boost the figures further.

The point is £40,000 paid early has the power of over £200,000 paid much later. There is any number of variations on this theme, where much smaller/shorter periods of contribution paid early have a dramatic effect.

However few 21 year olds have this buying power – but parents/grand-parents may  have:

If a parent or grandparent gifts money – conditional on it being invested into a pension fund – potentially this takes it outside of the parents / grandparents Estate, as it will be treated as either a Chargeable Lifetime Transfer, a Potentially Exempt Transfer or maybe even as an exempt gift, especially if it is paid out of normal expenditure.

Thus the opportunity exists for the parent / grandparent  to reduce the inheritance tax liability on their Estate.

The payment of pension contributions on behalf of the child / grandchild secures them an income in retirement in a very cost effective manner.

Of course the sums may not provide for a full retirement income, but it will make a sizable hole in the gap and get them on their way.