Paying into someone else's retirement plan and determining the amount is allowable.
In a bid to bridge the gender pension gap and provide a more secure retirement for loved ones, third-party pension contributions are gaining traction. These contributions, made by partners, parents, grandparents, or other relatives, can significantly enhance the retirement funds of individuals who have taken career breaks or had lower earnings.
Making contributions of the full £3,600 allowed to a junior Sipp per year could give a young person a pension pot of £104,000 by the time they are 18. This early start can provide a solid foundation for their financial future.
The gender pension gap is a pressing issue, with women losing out on an average of £7,600 a year in retirement compared to men. This gap is largely driven by women’s unpaid caring roles, which result in less time in paid work and lower pension contributions over their lifetime. Women are five times more likely than men to leave paid work to care for children, elderly or disabled family members, leading to a substantial reduction in workplace pension accumulation.
Third-party contributions offer a practical solution to this problem. For example, a partner making pension contributions to a woman who took time off for caregiving can help narrow the gender pensions gap. These contributions can be made even if the partner is working, provided the amount remains below their annual pension allowance of £60,000 for the current tax year.
Moreover, planning for a child's retirement may seem unnatural, but it can provide significant tax advantages. Compound interest and tax relief can significantly increase the value of small contributions made into a friend or relative's pension pot. Taken as an annuity, this could look like an extra £4,000 for life in retirement. If you did this for five years in a row, making five payments of £3,600 into someone's pension from age 35, this would provide them with an additional fund of approximately £61,000 at age 67.
These contributions can also help reduce a potential inheritance tax liability. Parents and guardians can set up a pension for a child to give them a head-start for saving for their future. Gifting money into someone’s pension can be a useful financial planning tool.
Younger people are more aware of the ability to pay into a partner's pension compared to older individuals. However, it's important to note that most additional rate taxpayers know about the partner's pension perk, while fewer higher rate and basic rate taxpayers are aware.
In conclusion, third-party contributions can help provide dignity and security in retirement for loved ones who might otherwise have insufficient pension funds due to systemic inequalities around caregiving and employment. They represent a practical tool to improve retirement outcomes for women, supporting a more equitable distribution of retirement income within families and helping address structural pension inequalities linked to unpaid care.
Investing in a junior Sipp can significantly boost a young person's savings, providing a solid foundation for their personal finance and retirement. Pension contributions from third parties, such as partners, parents, or grandparents, can help bridge the gender pension gap and offer a practical solution for addressing inequalities caused by unpaid caregiving roles. By making such contributions, one can not only help narrow the gap but also potentially reduce an inheritance tax liability and provide tax advantages.
