New analysis from leading online pension provider, PensionBee, reveals that contributing to an individual’s pension can be an extremely tax-efficient way to pass on wealth, helping loved ones secure long-term financial security.
However, most adults under the age of 45 currently receive gifts as cash transfers (1), which are subject to gift allowances and do not benefit from market growth or compound interest. Intergenerational gifting is expected to become much more common as ‘baby boomers’ increasingly wish to help their children and grandchildren financially (2).
PensionBee modelled several scenarios to highlight the potential of passing on wealth through pension contributions:
Scenario 1 proposed that a 60-year-old parent begins gifting their 30-year-old child £200 per month as a pension contribution until the parent reaches the age of 87. Taking into account the 25% tax top-up available on personal pension contributions, the parent’s annual contribution amount would reach £3,000 per year, and fall within the annual tax exemption for gifts (£3,000) (3). By the time the child reaches the typical retirement age of 64, this could accumulate to £229,017, almost four times the amount the parent had gifted (4).
Scenario 2 explored a parent making a £50 pension contribution per month over the same period of time. This would allow the parent to pass down £16,200 in total, which at the child’s retirement could accumulate to £57,254, almost four times what the parent had gifted (5).
Despite a difference in contribution amounts and overall pot size, scenarios 1 and 2 highlight that due to the power of compound interest and tax benefits, monthly pension contributions don’t need to be large in order to make a difference to one’s retirement wealth as long as one starts early.
Scenario 3 considered the impact of a grandparent making pension contributions, proposing that a 68-year-old grandparent begins gifting their 18-year-old grandchild £200 per month until the grandparent reaches the age of 88. This would allow a grandparent to pass down £48,000 in total over 20 years, which at the retirement point of the grandchild, could accumulate to £329,573, almost five times the amount the grandparent passed down (6).
Finally, scenario 4 explored a grandparent making a £50 pension contribution each month. This would allow a grandparent to pass down £12,000 in total over 20 years, which at retirement, could accumulate to £83,393 (7). This scenario showcases the power of saving and investing in a pension early, as the additional 12 years of saving in scenario 4 (before the grandchild can access their pension) gives the original £12,000 gift, more of a boost than the £16,200 gift in Scenario 2. It is important to note that these figures are dependent on market performance, which is not guaranteed.
Romi Savova, CEO of PensionBee, commented: “Auto-Enrolment has helped millions more young workers to begin saving for retirement, however, current low levels of pension engagement and minimum contribution amounts are likely to be insufficient in supporting an adequate lifestyle in retirement. Given the tough economic climate that young savers face, it seems sensible for parents or grandparents that can afford to do so, to contribute directly to a loved one’s pension.
Our research highlights that pension contributions are a powerful way to increase the value of a financial gift, providing vital long-term security. In addition, these contributions can carry additional benefits such as being eligible for additional tax relief if a saver is a higher or additional rate taxpayer, and reducing the size of an estate which is liable to inheritance tax.”
Appendix
Table 1: Parent gives adult child monthly gift as a pension contribution
| Monthly gift | Annual gift | Total gift | Grandchild’s pot size at 57 | Growth of gift | Grandchild’s pot size at 64 | Growth of gift | No. years gift is given | |
|---|---|---|---|---|---|---|---|---|
| 1 | £200 | £2,400 | £64,000 | £168,570 | 160% | £229,017 | 253% | 27 |
| 2 | £50 | £600 | £16,200 | £42,143 | 160% | £57,254 | 253% | 27 |
Source: PensionBee, November 2022. Assuming the parent begins giving at age 60, when the child is 30 and stops giving at age 87 (average life expectancy for people that are currently 60 in the UK, according to the ONS). The pension pot attracts a 25% tax top up, and grows at 5% per annum, with a 0.5% annual management fee.
Table 2: Grandparent gives adult grandchild monthly gift as a pension contribution
| Monthly gift | Annual gift | Total gift | Grandchild’s pot size at 57 | Growth of gift | Grandchild’s pot size at 64 | Growth of gift | No. years gift is given | |
|---|---|---|---|---|---|---|---|---|
| 3 | £200 | £2,400 | £48,000 | £242,585 | 405% | £329,573 | 587% | 39 |
| 4 | £50 | £600 | £12,000 | £60,646 | 405% | £82,393 | 587% | 39 |
Source: PensionBee, November 2022. Assuming the grandparent begins giving at age 68, when the grandchild is 18 and stops giving at age 88 (average life expectancy for people that are currently 68 in the UK, according to the ONS). The pension pot attracts a 25% tax top up, and grows at 5% per annum, with a 0.5% annual management fee.
Footnotes
- Office for National Statistics
- Resolution Foundation
- UK Gov
- Assuming the pension pot attracts a 25% tax top-up, and grows at 5% per annum, with a 0.5% annual management fee.
- Ibid
- Ibid
- Ibid
