What's the parent’s ability to contribute to their adult child’s pension?
31 March 2022
Question by stephen
I was interested to read your answer regarding a parent’s ability to contribute to their adult child’s pension. Firstly is the £3,600 per recipient or can a parent only make up to that amount. Ie if two kids and only one parent would that be £1800 each. Additionally if the parent had taken Fixed Protection and therefore was not allowed to contribute further to their own pension does that prevent them making contributions to their children? Lastly if it does can they still use the £3k gift allowance that you refer to? Thanks Steve
Answered by Robert Powell
Thank you for your question.
Any person up to the age of 75, if they have no 'relevant UK earnings' (such as employment income such as pay, wages, bonus or overtime - not an exhaustive list) or income up to £3,600 per year, can contribute or have contributed to their pension up to £2,880 net (£3,600 gross) per year. On this level of pension contributions, basic rate income tax relief of 20% is collected from HMRC added at source by the pension administrator.
The calculation works as follows - if you take £3,600 and multiply this by 20% you get £720 income tax relief. £3,600 gross less £720 tax relief is £2,880 net.
A contribution of £3,600 gross per year is a common option for non-earners, such as minors or retirees (pension income does not count as 'relevant UK earnings').
- An individual contributing to their own pension could contribute up to £2,880 net, with the balance coming from tax relief
- An individual contributing for another person could also contribute up to £2,880, again with the balance coming from tax relief
If a person has relevant UK earnings, such as a salary, contribution levels can be higher. in this scenario, typically contributions are capped the lower of the persons income or £40,000 gross per year (exceptions apply and it would make sense to speak to a financial adviser to discuss this further if you needed to).
Making a pension contribution to another persons pension has no effect on the contributing person's fixed protection as they are not contributing to their own pension by doing this.
Contributions to another person of £2,880 net would fall within the annual gifting allowance which can be made inheritance tax free of £3,000 per person per year. As such, the gifting person would have a remaining allowance of £120 in this scenario, but then other allowances are also available should they be needed.
If a person has two children, they could contribute £2,880 net for each child, but then this is above the £3,000 annual gifting allowance - but if you survive 7 years post-gift this would be exempt from inheritance tax. If there are two parents, or a parent and a grand-parent, they could each use their £3,000 annual gifting allowance?
I hope you find this helpful.