Financial Planning Matters… a monthly insight with Jonathan Beardmore, an IFA at Pearson Solicitors and Financial Advisers.
WOULDN’T IT be nice to leave your grandchildren (or children) with an inheritance that would be outside of your estate for inheritance tax purposes the moment you gift it to them?
And wouldn’t it be wonderful if a product you decided to use to pass on this inheritance would prevent a 21-year-old grandchild buying a Porsche and be invested in such a way to provide him or her with a 20 per cent immediate return plus security in the long term?
As it happens, this is actually relatively easy to achieve providing you don’t mind the following stipulation: your grandchild will have to be 55 before they can access their benefits!
For the more observant among you, you may have already realised I am talking about pensions and in particular personal pensions.
The first question you may ask is – why on earth would I want to put money away for a grandchild which they cannot access until they are 55?
The answer is simply because you want to pass money down the generations tax efficiently and in a way that is protected from the urges of youth.
So how would such an investment work?
Each person has an allowance of £3,600 that they can put into a pension each and every year, even if they have no earnings.
This means a parent or grandparent could set a personal pension up for their one-year-old grandchild.
Better still, the government also contributes 20 per cent tax relief, so a contribution of £3,600 would actually cost you £2,880 and the government would top up the pension with an additional £720.
Providing this gift is made up out of excess income, for example your own pension or investment income, then you completely avoid any liability to your IHT.
In a scenario where a one-year-old child had £3,600 a year invested for them, this alone can build up to a pot of £36,000 when the grandchild reaches age 11, even without any growth.
Should this £36,000 then have a further 45 years or so to be invested until they are 55 it means a relatively small amount of initial money could ensure a pension pot which attracts not only income tax relief, grows tax free, is not available until maturity but is also free from IHT on the donor’s death.
Providing you and your grandchildren are somewhat patient types, there are very few strategies available to UK investors that even come close be being as tax advantageous as setting up a personal pension for a grandchild.