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Contact us | www.future-financial.co.uk | E-mail your comments | Archive | |
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Helping future generations Grandparents can help future generations and do some effective inheritance tax planning, too. It may sound rather strange talking about making pension contributions for children, particularly since they will not be able to access the money until they are 55 and that is provided the minimum age is not hiked again in future, as it will be (from 50 to 55) in April. There are, however, a number of reasons why this could be a good idea and an ideal complement to Child Trust Funds (CTFs).
Generous contribution limits It is possible to make pension contributions up to £3,600 a year for non-earners (such as children) and you only have to pay £2,880 of this as the balance is made up by HM Revenue and Customs in the form of basic rate tax relief (currently at 20%). Pensions grow free of tax, which means that there is no income or capital gains tax on money within the fund, although dividends from UK companies are taxed at 10% (which can no longer be reclaimed). Access to money later in life After April 2010, pension funds will not be available until age 55 (although some pension commentators favour a move towards the American 401K system of pensions, which allows limited access to funds earlier on). There are also restrictions about how the money is taken. Only 25% can currently be taken as tax free cash, the balance must be taken as an income, either directly from the fund, or through the purchase of an annuity (there are also likely to be new ways of taking an income by the time they come to retire). Under the current rules, it is possible to take the lump sum and defer drawing an income as late as age 75, if required. Delaying the age at which children get access to their money is a good way of ensuring that it is not all blown on a motorcycle. On the other hand maybe 55 will be the new 18, by then! Inheritance tax implications Providing a pension for children and grandchildren can also have potential tax planning advantages. The contribution of £3,600 is actually higher than the annual allowance for gifts that are free of inheritance tax. However, larger gifts are allowed provided they come from normal income expenditure (which basically means that making them does not reduce the donor’s standard of living). If the donor lives at least seven years after each gift (or ‘potentially exempt transfer’ called PETs) then no inheritance tax can apply in any case. This means that the money given is outside the donor’s estate on death; and pension schemes are not subject to the sort of tax that applies to other forms of trust. It is important to take professional advice before making any decision relating to your personal finances. Key Points: > Pensions are highly tax efficient > An income and lump sum from age 55 > Can help with inheritance tax planning |
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©futurefinancial This publication represents our understanding of law and Inland Revenue practice as at the date of publication. It does not provide individual tailored investment advice and is for guidance only. Rules may vary for Scotland and Northern Ireland. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of land and buildings is generally a matter of a valuer’s opinion rather than fact. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Your home may be repossessed if you do not keep up repayments on your mortgage. Loans are subject to status and written details are available on request. Always seek independent advice from a qualified financial adviser. Think carefully before securing other debts against your home. Fees for mortgage advice maybe charged and for details of these please contact us. The Financial Services Authority does not regulate all the activities undertaken by the company, including taxation advice and overseas mortgages. |
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