Paying into daughter’s pension

[flydigital]

I want to pay money into my daughter’s pension on the assumption that for every £100 i pay in she gets extra credited - i think it’s 20% but bot sure. I earn around £80k and dont have a pension. She earns about £25k and has paid in a tiny amount.
Her pension is with Nutmeg. They say only she can pay in.
If I give her the money and she pays it in is it the same end result as me paying it in directly? Just wondering if this is OK and ensures that any tax advantages are used in the process.
Thanks for any clarification on this.

[strawn]

Suppose you gift her the money. Then for each £80 she contributes to her pension the taxpayer (via HMRC) adds £20. She can add up to a gross amount per tax year equal to her earnings, so about £25k. The amount she'd hand over would then be £20k, with HMRC adding the rest. I suspect that few people add the maximum allowed annual amount to their pensions unless they've come into a windfall.

On the other hand, because you are a higher rate taxpayer you could consider adding £24k per tax year to a pension of your own. HMRC would make it up to £30k. Then you would claim tax rebate from HMRC and get £6k back. So overall the £30k in your pension will have cost you an out-of-pocket
£24k less £6k = £18k.

£18k buys £30k is striking value. Then when you reach the age when removing money from your pension is allowed (currently 57) you could take out 25% as a tax-free lump sum and gift it to your daughter. The other 75% you would retain for withdrawing as income when you retire.

Overall that would be more tax efficient (unless you were to run into problems with inheritance tax or with some future tax which we can know nothing about).

There's nothing to stop you using a bit of each strategy.

[someone]

I agree with what strawn has said.

One other consideration - I don't know what happens to the personal allowance if you pay 100% of your earnings into your pension. You will get tax relief in the pension but you won't have paid tax on that money. I don't know if you "win" in this circumstance or whether you end up having to pay it back to HMRC.

One other thought - you might want to consider just giving her the money to put into an ISA instead. Although you won't get the tax relief up front, you also won't get taxed when you take it out. The way things are going, your daughter will get 20% relief putting the money in but by the time she retires she might be paying 30 or 40% taking it out again. Additionally, she'll potentially have been paying 5%+ on a mortgage (after income tax) while earning 5% or so before tax in her pension. So she might wish that the money wasn't tied up quite so tightly!

There is no "right" answer to pensions, but my personal opinion is that it's rarely worth paying money into a pension unless a) you'll get higher rate relief on the contributions or b) you're so close to retirement that you can be reasonably confident that you're actually going to see some benefit from that 25% uplift in real terms.

On the other side of that calculation though, I believe that a) pensions are not counted towards assets during benefit assessments (but bear in mind that most wealth tax proposals do include pensions) and b) you cannot "fritter it away" until you're at least 57 (probably older by the time she gets there).

[flydigital]

Thank you both for those interesting perspectives. A great help!

[strawn]

"Someone"' makes a good point about ISAs. It reminds me of the existence of a thing called a Lifetime ISA. It can be opened by anyone under forty and they can keep contributing until they are fifty.

Suppose you gifted your daughter £4,000. She adds it to a "Stocks and Shares" Lifetime ISA. The taxpayer via HMRC adds £1000.
She now has £5000. There are two ways she can use this without penalty. (i) She can use it towards the purchase of her first house. Or (ii) She can wait until she is sixty and then take out all the money tax-free. That's a pretty wonderful pension-like job it's doing and yet if she needed the money in an emergency she could draw it out with the penalty of giving up 20% of its value. That's equivalent to giving the taxpayer his subsidy back plus 20% of the investment growth. That's a pretty bearable penalty in my view.

(Warning: I'm too old for a Lifetime ISA so my memory of the detail may not be precisely correct but you can google it in a jiffy.)

Anyway I think the Lifetime ISA is a wheeze so wonderful for the customer and so awful for the taxpayer that it's bound to be scrapped sometime in the next few years. If you like the idea it might even be wise to open one before the Budget next month.

[flydigital]

Thank you again for the insights on this.

Slightly different query - I did actually pay into my daughter's pension a while ago on another platform which allowed this. I did so on the understanding that whatever I paid in would be topped up. I paid in £333 thinking this would result in her being credited with £400. She says her account simply shows a credit of £333. Maybe I have misunderstood how this works but I had expected it to magically get a top up of 20% !

[someone]

Firstly it's 25%, not 20% so 333 would be topped up to 416.

The tax relief is 20% of 416 or 25% of 333


Secondly, I don't know what the legal position is here assuming she had sufficient relevant earnings. But you paying in rather than giving it to her to pay in has at best made things tricky. Your best bet is to call the pension company but my guess is that relief is only given for contributions paid in by the person themselves. Most commonly, third party contributions are from an employing company so pension companies must be used to dealing with third party contributions.

You might be able to find the letter saying you're going to give her 333 and her reply asking you to pay it into her pension - and that might be enough to make it relievable. But it might not...

[flydigital]

OK thank you - I will get her to pay it in next time and see if that makes a difference to how it is credited.
I will also look at the ISA option too - makes a lot of sense for accessing money earlier than pension age if needed.

[D&C]

Did you check if the provider pre funds the tax relief or not?

Some do but plenty don't and the tax relief is only credit when the provider receives the funds from HMRC.

I think it works on a monthly cycle so if you pay at the wrong time you (she) could easily be waiting several weeks before the tax relief is added.

For example say the providers cutoff is 5 November, to have tax relief credited on say 20 December. Add something today and it will be 20 January before the tax relief is credited.