Home' Life from Fifty : May 2013 Contents Protecting a child’s inheritance
Funds held in capped drawdown can be very inefficient from
a death benefit perspective. If the capital is to be paid to the
children as a lump sum when they die, it will currently be
subject to a 55 per cent tax charge.
This means the children will receive only 45 per cent of the
value of that fund when the parent dies. If a key aim of the
parents is to protect their children’s inheritance, and they are
not utilising their maximum available income, if appropriate it
may make sense for them to use this surplus income for some
proactive estate planning.
Passing on wealth tax-efficiently
There are many ways in which parents are able to pass on
surplus income to help their children, such as paying off their
debts or reducing their mortgage. However, a tax-efficient way
of passing on wealth is by making a pension contribution for
them. Any income tax suffered by the parent on the income
they take is usually negated by the fact that contributions made
on behalf of their child can be grossed up at the child’s highest
marginal rate of tax.
Securing a child’s long-term financial future
Putting money into a pension means that the parent is
securing the long-term financial future of their child,
especially where a child’s earnings ay limit the amount they
can currently save personally for their future. As the money
is not immediately available, this removes the risk of children
‘frittering away’ away their inheritance. Instead they will have
access to the money from the age of 55, when they could use
it to pay off their mortgage and help fund their lifestyle in
Utilising surplus income from a parent’s pension
The following demonstrates how effective it can be from a tax
and estate planning perspective to utilise surplus income from
a parent’s pension to fund a child’s pension. In this example,
the parent currently has a drawdown fund of £300,000.
If the parent takes no action, and they die ten years from
now, their drawdown fund could have grown to £495,000.
This would leave an inheritance of £222,750 for the child after
55 per cent tax has been paid.
If the parent instead starts to take £10,000 a year from their
drawdown fund to pay into their child’s pension, although the
parent will suffer 20 per cent income tax, the child will receive
20 per cent tax relief (assuming both are basic rate tax payers)
. So if the parent dies ten years from now, their drawdown
fund could now be worth £361,000.
This would leave a lump sum of £162,450 for the child after
55 per cent tax has been paid. In addition, the contributions
paid to the child’s personal pension could be worth £135,700
after ten years, bringing the total value of the child’s
inheritance at that point in time to (£162,450 + £135,700 =)
This simple planning could therefore increase the value
of the child’s inheritance by (£298,150 – £222,750 =) £75,400
after just ten years. Depending on the age of the child when
the parent dies, they may not be able to access their pension
immediately. If the pension stays locked away for longer, then
it has more time to grow. For example, leaving the pension
fund untouched for a further ten years could see it grow to
Starting planning sooner rather than later
Parents fortunate enough to have accumulated substantial
savings may like to consider the best way to pass some of
those savings on to their children. Parents are likely to be more
successful with estate planning if they start sooner rather than
later, and pass on some of their intended inheritance while
they are still alive, especially if they know they have savings that
far exceed their foreseeable needs.
Avoiding any future retirement income problems
Utilising surplus pension income to fund a child’s pension can
help boost the value of the inheritance parents pass on to their
children. A pension still remains one of the most tax-efficient
forms of saving and it will ensure the child is better positioned
to avoid any future retirement income problems.
Those in retirement know better than anyone how important
it is to have adequate savings, so what better way for parents
to provide for their children than to ensure their long-term
security through opening a pension for them?
Boosting your child’s inheritance by thousands
Parents could boost the value of their children’s inheritance by thousands of
pounds if they start to take action while they are still alive. Something as simple as
using surplus pension income to pay into a pension for their children can make a
significant difference to the value of the inheritance they leave behind.
(All figures relate to the 2012/13 tax year. Information is based on our current understanding of taxation legislation and regulations. A pension is a long-term investment, and the fund value may fluctuate and can go down. Your eventual
income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Pension drawdown is a complex product and is not suitable for everyone. The Financial Services Authority does not regulate estate planning,
wills or trusts.  Figures assume a growth rate of 6.5 per cent p.a.  To use such planning, the contributions made by the parent (plus any contributions currently being made by the child/employers) in any tax year must not exceed the greater
of £3,600 or 100 per cent of the child’s earnings.)
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