Ask for a peek at your child or grandchild’s Christmas list, and depending on their age, you might find the Bluey Family BBQ playset or the latest next-gen games console.
You’re unlikely to see “Contributions to my pension”. However, providing loved ones with a stable financial start in life is probably high on your own list of priorities – and with good reason.
According to This is Money, Generation Z (those born between 1997 and 2012) will need more than £3 million in their pension pots to retire “comfortably”. To amass that kind of pension wealth, they’ll need to start saving early.
In light of upcoming changes to the Inheritance Tax (IHT) treatment of unused pension funds, you might be looking for tax-efficient ways to lower the value of your estate. Paying into a child’s pension could prove an effective strategy for you and your loved ones.
Keep reading to find out how.
Preparing for retirement is a long-term strategy, so starting early is key
According to This is Money, a 25-year-old who wants to finish work aged 65 and live a “comfortable” retirement will need a pension pot worth £3.1 million. “Comfortable” in this context includes an annual overseas holiday and the occasional UK-based weekend break. The figure rises to £4.3 million for a two-person household.
The Pension and Living Standards Association (PSLA) annual report on the cost of retirement confirms that the equivalent figure for a single person retiring today is around £800,000.
This shows the impact of inflation during a 40-year career. Moreover, your 25-year-old child will likely want more than a comfortable retirement at 65. They’ll want to live their dream lifestyle, which comes at an additional cost.
3 reasons why you might opt to pay into a pension on behalf of your child this Christmas
1. A pension provides valuable money lessons alongside future financial stability
You can set up a pension on behalf of your child (if they are below the age of 18) as their parent or legal guardian. Once it’s set up, other family members, such as grandparents, can contribute on your child’s behalf.
Once they turn 18, your child becomes the account holder, but you can continue to contribute if you wish.
As with any pension, funds cannot usually be accessed until the minimum retirement age (currently 55, rising to 57 in 2028). This means your child’s money will be invested until then, hopefully providing financial security in later life. However, this also means the money is effectively tied up and can’t be accessed to pay education fees or used towards a first home, for example.
We know that our relationship with money is formed early. Introducing your child to concepts like long-term investing, risk versus reward, and the benefits of compounding from an early age could set them on the right financial track.
2. Contributions to a loved one’s pension attract tax relief, so it can be incredibly tax-efficient
You’ll be aware that the pension Annual Allowance in 2025/26 stands at £60,000 (or 100% of your earnings, if lower). The Annual Allowance is the maximum amount you can contribute to your pension in a single tax year without facing an additional tax charge.
As a high net worth individual, you may have already maxed out your own Annual Allowance for this tax year or be subject to the Tapered Annual Allowance, limiting the tax-efficient contributions you can make. You may also make contributions through your business as an allowable expense where wholly and exclusively for the purpose of the business.
Either way, you could opt to help a child (or your partner) make tax-efficient use of their pensions by contributing up to their Annual Allowance. Contributions into the account of a child below age 18 (or anyone without earnings) can receive tax relief on contributions of up to £3,600 gross without a child needing relevant earnings. This means you can contribute up to £2,880, with £720 added by the government in the form of tax relief.
A gift to an adult child that they then contribute to their pension, could have additional benefits, such as helping them to avoid the so-called “Child Benefit tax trap”. Be sure to get in touch if you think pension contributions could help your loved ones.
3. Giving while living could be tax-efficient for you, lowering the value of your estate
It’s no secret that the government’s IHT receipts are rising – and will continue to rise following the extension to the existing freeze on the nil-rate and residence nil-rate bands. The Office for Budget Responsibility (OBR) expects receipts to reach £9.1 billion in 2025/26. Money Marketing confirms that the figure for last year was £8.2 billion (and this marked a £800 million rise compared to 2023/24).
Contributions to a loved one’s pension help to lower the value of your estate for IHT purposes, and they could be IHT-free from the moment you make them.
HMRC’s “normal expenditure out of income” exemption allows you to make regular gifts IHT-free. You’ll just need to prove that the gifts are:
- Regular
- Paid from income
- Not detrimental to your usual standard of living.
Accurate record keeping is key here, as gifts that don’t make use of HMRC exemptions will generally be classed as “potentially exempt transfers (PETs)” and only become tax-free if you survive for a further seven years after the date the gift is made.
Get in touch
While it might not top your child’s Christmas list, a pension investment could be the gift that keeps on giving, both for you and your child. If you’d like help making tax-efficient pension contributions on behalf of a loved one, get in touch. Contact us online or call 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). 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. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
