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Yes, you can contribute to someone else’s Pension

Did you know that you are able to contribute to someone else’s pension?

There are big tax benefits for saving into a pension pot; if contributions are within the annual allowances then there is no tax payable on any growth. Tax is only paid at the marginal rate of the pension owner when they take money out. However, it is worth noting that under current legislation no withdrawals can be made until age 55, rising to 57 in 2028.

There are many groups of people who could benefit hugely from someone paying into a personal pension for them including:

  • those who aren’t earning, perhaps because they are looking after children or caring for someone
  • those who have just started out in their careers and are only able to make modest contributions.

The amount you can contribute depends on the circumstances of the pension owner, not the person who is making contributions. The amount that someone can pay into their pension(s) every year is either £40,000 or 100% of their earnings, whichever is lower. Tax relief is automatically added to the pension pot at the basic rate. And if the pension owner is a higher rate tax payer, they can claim back additional relief via their tax return.

Even if you don’t earn, you can contribute up to £2,880 per year to a pension and still get tax relief at the basic rate. This even applies to children. Much like a Junior ISA, parents and legal guardians may set up a pension for a child, which will pass to them when they are 18. Once set up, anyone can make contributions up to a total of £2,880 per year for a child, boosted to £3,600 gross. Although it may seem like extreme forward planning, the tax-relief added to the compound interest built up over time make it an excellent way to save for your child’s or grandchild’s future.

So when might it be a good idea to take advantage of this tax-planning opportunity? Well, if you have maximised your own pension contributions and have surplus income, you might want to pay  into your spouse’s or child’s pension. Alternatively, as mentioned above, pension contributions to a child or young adult are a tax-efficient gift that can help with their long-term financial security.  Within the right circumstances, timely contributions may reduce future inheritance tax bills or help a pension owner affected by the ‘high income benefit charge’ qualify for child benefit payments.  There is a lot to consider around pensions and we would always recommend you take advice.

Please be aware that your capital will be at risk when you invest, and that you may get back less than you invested. This article does not constitute financial advice, so before acting upon it, the  reader should always take the appropriate financial advice.

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