The Child Benefit Trap & Pensions

A major government review, lead by John Cridland (former director general of the CBI), looking into the long term viability of the state pension has recommended that the state pension age is increased from age 67 to 68 for those retiring between 2037 and 2039 – seven years ahead of schedule.

For many young people, it seems likely that 70 is going to be the new state retirement age and this means that there’s going to be a significant gap created between the new later state pension ages and the retirement age for private pensions.  There must be a greater need than ever for early pension planning.

For parents, it’s a worry that children or grandchildren may never get enough spare money together to fund for a pension.  The cost of educational loans, and getting on the housing ladder as well as starting a family, probably results in this financial need being cast aside, often meaning expensive and last minute pension planning.  Parents with spare income can fund pensions for children whilst improving on their IHT position.  This route has a number of advantages.  Firstly, a pension contribution attracts tax relief so the contributions gifted are automatically increased with 20% tax relief claimed from the HMRC by the pension company at source.  This means an £80 pension contribution is increased to £100 through tax relief.  Secondly, parents can pass on money via a pension by using either their annual allowance (for IHT) or gifting using the normal expenditure allowance. This has to be one of the most tax efficient ways of saving.  Also, from a parental viewpoint you are locking into the investment for the long term so the savings can’t simply be raided for other purposes.  Children who are higher rate taxpayers also benefit from higher rate tax relief.  This may also result in helping children who fall into the Child Benefit trap.  Child Benefit may have a number of implications for higher earners.  Legislation introduced in 2013 means that couples where one spouse earns more than £50,000 p.a. will see the value of their Child Benefit hit by a tax charge.  Making pension contributions may help avoid this situation.   As a side note, there has been a further complication with Child Benefit itself.  Many mothers have decided to decline claiming Child Benefit due to this tax charge but may not have understood the implications of their decision.  In November last year, Royal London estimated that the number of mothers declining to claim Child Benefit has reached 50,000 and that a woman who started her family in early 2013 will have missed out on 4 years’ worth of National Insurance credits which Royal London have estimated as equating to a loss of over £1,000 p.a. in State Retirement pension. Declining to claim the benefit will result for some in a loss of State Pension at retirement.  This consequence seems very unfair.

Finally, following on from the last article, I need to mention, especially for the eagle-eyed readers who like to stay on top of everything, that the reduction in the tax-free amount of dividend income from £5,000 to £2,000 has, at the time of writing, been reversed.  Whether this will be a long term reversal or not is yet to be determined – however – it would certainly be welcome news for the many retired people who rely on this type of income for their retirement needs.

Helen Mulvaney

The article is for information only, it is recommended that you seek independent advice before taking any action.

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