A mother wants to help her self-employed son. What are the best options for buying a pension for him?
My 44-year-old son is self-employed and investing his income into his business.
I would like to start a pension for him. What can I do and do I have to tell him? As I am an additional-rate taxpayer can
I claim tax relief on the money that I put into his pension?
Thanks to automatic enrolment, 87% of employees – equivalent to more than 10 million additional people – are now saving toward a pension.
Sadly, this initiative only applies to people who are employed, as Patrick Connolly, chartered financial planner at Chase de Vere, explains: “Many self-employed people are focused on their own businesses and neglect their personal finances, including saving into a pension. This is a shame as pensions are a really tax-efficient way to save for retirement.”
Investments into pensions benefit from initial tax relief, tax-free growth and, from age 55, you can take 25% of the pot as a tax-free lump sum. The earlier someone starts a pension, the longer it has to grow and the easier it is to build up enough to fund retirement.
“Ideally, by age 44, your son should already be saving into a pension,” adds Connolly. “However, it’s better that he starts now than does nothing, and it’s great that you’re willing to help him.”
There is nothing to stop you setting up a pension for your son and paying into it, but it is his tax status that would be relevant.
“Basic-rate tax relief would be added to your contributions, turning every £80 you pay in into £100,” explains David Jamieson, financial adviser at Gee 7 Wealth Management.
“As long as your son isn’t already paying into a pension, you can contribute up to £240 a month without worrying about any tax implications.”
Although you could do it without telling him, Connolly says that it is worth letting him know, because there may be more tax benefits.
“If he’s a higher- or additional-rate taxpayer, he can claim further tax relief through his self-assessment tax return,” he explains.
For example, using the £80 example above, if he is a higher-rate taxpayer, he would be able to claim a further £20 back through his tax return or £25 if he is an additional-rate taxpayer.
Picking your prescription
Once you have decided you want to start a pension for your son, you will need to select a suitable one.
Connolly says: “There are a number of personal pensions, or self-invested personal pensions (Sipps), which have competitive charges and give you access to a wide range of investment options. Providers such as Standard Life, Aviva, Royal London and Fidelity FundsNetwork have decent products.”
While these pensions offer plenty of choice on the investment front, if you just want to pick a fund and leave it, Jamieson recommends the Vanguard LifeStrategy 80% Equity Fund.
“As you’re likely to be investing for 20-plus years, investing in a fund that holds 80% of its portfolio in equities is sensible,” he explains. “Over that length of time, equities are likely to result in inflation-beating growth.”
Rather than – or in addition to – setting up a pension in your son’s name, Jeannie Boyle, director and chartered financial planner at
EQ Investors, says that you might want to consider paying into your own pension and leaving it for him to inherit.
“You can choose not to use the pension and nominate him as the beneficiary,” she explains. This triggers another tax benefit as there is no inheritance tax to pay on pension funds. If you are under 75 on death, your beneficiaries can take it tax-free but if you are over 75, anything they take from the pension will be treated as income from a tax perspective.
The downside of using your own pension is that your son will have to wait to inherit it, which hopefully will not be for many years.
However, doing this could be advantageous for your own tax position, especially as you earn between £100,000 and £125,000.
There is a nasty tax trap for people with earnings in this region when your personal income tax allowance is at the rate of £1 for every £2 over £100,000. Paying into a pension could lessen some of this pain.
“Any contribution you make to your pension is grossed up and deducted from your overall income to give you your ‘net adjusted income’,” Boyle explains “This will give you some of your personal allowance back.”
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Setting up a pension for my brother, without his input
"Can I set up a pension for my son and do I have to tell him?" Have looked to do this for my brother, but actually it's turning out to be very hard to do. Technically yes, you can do it, but feasibly we need to use a financial adviser for even the simplest pension plan (e.g. with Aviva or Royal London) as they don't accept third party payments otherwise. That's then putting up the cost of the pension dramatically. Also, we can't view the pension, so we can't check its performance. Good idea in principle, but not going to work for us I'm afraid, which is a real shame as my brother has learning difficulties, has been unable to fully integrate into society and still lives with our Mum, but he isn't classed as a vulnerable adult. He may end up being one of the homeless statistics in the future, if we can't find a way to help him.