Sally wanted to talk about making inheritance tax children’s gifts when I visited her to amend her will on the birth of her four-week-old grandson, Josh. She asked me if I had a pension. ‘Non-sequitur,’ I thought. It was her opening for a discussion on the advisability of a pension for the boy.
She wanted to give the baby a running start – in the most tax-efficient manner. She was on the horns of a dilemma – a child’s pension or a Junior ISA.
The pension wins by several lengths.
A child’s pension could accept contributions of up to £2,880 plus tax relief – this would take the contributions to £3,600. Any contributions beyond £2,880 are allowable, but would not attract the tax relief.
A pension may not be accessed till the holder is 55. I wouldn’t have trusted myself with serious amounts of money at 18 or 21. Honestly, other than waste it, what would you have done with a cheque that would have paid for a two-bedroom flat in a provincial town?
Time Effect of Money
Time, more to the point, the compounding effect of time, is our friend here. My friend and colleague, the financial adviser Mary Waring advises one could expect annual returns of 7%. The real rate of return (net of fees and inflation) would be of the order of 4%. Sally’s planning to contribute £2,880 annually. If she made annual contributions till Josh was 18, the pot would have grown to £101,762 – if the fund were left (with no additional contributions) till Josh’s 55th birthday, he’d have a nest egg of £434,329 in today’s money.
Don’t waste your allowances. There are more than 109 rules, allowances and exemptions. There’s a more suitable rule. We’ll talk about this next time.
To talk about making the most of your allowances and making inheritance tax children’s gifts, get in touch for a free, no obligation appointment.