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Parents could make their baby an adult millionaire by starting a pension pot when they are born. Children born this year could become millionaires by their 43rd birthday if their families contribute to a pension for the first 18 years of their lives[1]. The analysis found that parents or grandparents contributing £2,880 per year (£3,600 after tax relief) until their children turn 18 years old could create a pot of £1,021,837 by 2061. The figure assumes a total contribution of £51,840, a growth rate of 8% per annum, and is net of product charges.

Substantial pot of cash
Whilst the assumed growth rate may seem high, data from Moneyfacts, the comparison website, showed that average returns from pension funds were 10.5% in 2017 and have seen double-digit growth for six consecutive years.

While lower growth rates reduce the return, they would still leave children with a substantial pot of cash to help them retire. Average growth rates of 2% and 5% mean that, by the time the child reaches its 55th birthday (2073), they would have a pot of £171,086 and £668,592 respectively.

Loved one’s pension
On an average 5% growth rate, the child would be a millionaire by the time they retire in 2083 (65 years old), with a pension pot of £1,089,067. By the same milestone, a growth rate of 8% would create a pension pot of £5,555,260.

Previous research found that very few people would consider contributing to a loved one’s pension – only 2% of over-55s said they would support a relative by putting money into a pension fund. By contrast, 68% said they would leave their family an estate when they pass away, compared with 34% who would help their family with ongoing gifts of any kind.

Compounding interest
Despite its obvious advantages, contributing to a family member’s pension is one of the last thoughts to cross the majority of people’s minds. Yet, provided growth rates remain at current levels, it could make a millionaire of a child born today by the time they hit middle age from a relatively modest £51,840 over 18 years. It’s the power of compounding interest in action.

One of the biggest obstacles to passing on wealth tends to be the parents or grandparents worrying that their younger family members will ‘waste’ the money on frivolous purchases. But, pension contributions guarantee that their children won’t be able to use the proceeds until they are pensionable age.

Tax-efficient savings
If they don’t want to exert that amount of control, they can look at other ways too. Junior ISAs offer tax-efficient savings until a child is 18, albeit there is no tax relief. However, if they want to be very specific about what their money pays for, discretionary trusts are another option, keeping it vague about who benefits and in what capacity.

For most parents, saving regularly is an integral part of securing their child’s financial future. Making regular contributions to a child’s pension may not seem like the obvious choice. However, given the flexible nature of pensions and the tax relief offered by the Government, they can provide a very simple way of securing children’s financial future in retirement.

Source data
[1] Figures taken from Brewin Dolphin’s ‘Mind the generation gap’ research, which included a detailed survey of 11,000 people.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION
BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Redefining how millennials become more financially secure

Millennials are set to redefine how wealth is shared between generations, according to new research[1]. Contrary to expectation, it is not millennials (aged 18–34) who appear to be under the greatest financial strain, with 44% saying they are ‘comfortable’ financially. In fact, the research shows they are trying to do the right thing.

Three quarters (73%) are putting money into savings, and as a generation they are saving the highest proportion of their income (14%). But while many millennials save hard, the cost of assets – especially property – means that no matter how hard they save, many won’t be able to establish the lives they want without assistance.

Uninformed about money
Some have given up on saving – 19% of 18 to 34-year-olds feel that major life goals, such as home ownership, seem so unachievable that it has discouraged them from saving (compared with 7% overall in the survey). Over one in ten (14%) also feel uninformed about the amount of money they should be putting away.

While two fifths (44%) of UK adults consider themselves financially ‘comfortable’, the squeezed middle are at their peak earnings and at their peak outgoings, with some supporting both children and their own parents. This has resulted in over a third (37%) of Gen X (aged 35–54) ‘making ends meet’ and a fifth (19%) admitting to ‘struggling’. Out of those aged 35–54 who are struggling, 70% of them worry about money all the time and a third (33%) sometimes go without to provide for the rest of the family.

Supporting other generations
Millennials are stepping in to provide financial support to other generations. Over a third have already supported their parents financially (36%), double the average and up from 23% in 2016. Two fifths (39%) of them say they would also financially support their parents in later life – significantly higher than both Gen X and Baby Boomers (aged 55+) at 15% and 2% respectively.

Looking further to the future, only a very small number of millennials (9%) believe that their children should have to support themselves financially when they leave home. Over three quarters (78%) of millennials plan to financially support their children in the future when they leave home.

Comfortable living standard
More than two fifths (41%) say that in addition to helping with university costs for their children, they intend to also support with day-to-day living costs such as food (33%), clothing (26%) and phone bills (20%). To compare, less than a third (32%) of Gen X would help with university fees for their children, and even fewer would with food shopping (22%), clothing (12%) or phone bills (12%).

Aware that providing this level of financial support to both their parents and their children will have consequences, more than a fifth (21%) of those aged 18–34 are already worried they will need to work longer and that they won’t have enough money for their own retirement (also 21%). Especially considering that nearly two thirds (63%) of them already admit they are saving too little to have a comfortable standard of living in the future. Millennials therefore expect help in return, with three quarters (75%) saying that they intend to rely on their own children for financial support in the future.

Emotionally tied generations
Dr Eliza Filby, Generations expert and historian of contemporary values adds: ‘Millennials have been more financially dependent on their parents than any other previous generation, and they recognise that they will have to reciprocate this as their parents age and they themselves become more financially secure.

‘They too want to offer the same opportunities and support to their children that their parents gave to them. This attitude towards financial intergenerational dependence is very different to behaviour we have seen from previous generations for two very important reasons: children are dependants for much longer, and the elderly are living much longer. The family unit are more financially interdependent and emotionally tied than at any other time since before the Second World War.’

Source data
[1] Family Wealth Report research conducted by Opinium Research for Brewin Dolphin amongst 5,000 UK adults between 30 August and 5 September 2018.

Investing for the future is vital if you want to enjoy a financially secure retirement, and it requires you to look at the big picture. Although pensions can be complicated, we will help you get to grips with the rules if you are considering making contributions ahead of the tax year end. Here are our top pension tax tips.

Annual and lifetime limits
Getting tax relief on pensions means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you receive on your pension contributions. Please note that if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Provided that you stay within your pension allowances, all pensions give you tax relief at the rate that you have paid on your contributions. For personal pensions, you receive tax relief at the basic rate of 20% inside the pension. That means for every £800 you pay in, HM Revenue & Customs (HMRC) will top it up to £1,000. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your self-assessment tax return.

Benefit from tax relief
For workplace pensions, your employer normally takes your pension contribution directly from your salary before Income Tax so that the contribution is not taxed at source like the rest of your employment income, and therefore the full benefit is received inside your pension immediately. If your employer does not handle your contributions before tax, then these would benefit from tax relief in the same way as for a personal pension contribution.

You’re still entitled to receive basic rate tax relief on pension contributions even if you don’t pay tax. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you factor in tax relief.

Total amount of contributions
The annual allowance is a limit to the total amount of contributions that can be paid in to defined contribution pension schemes and the total amount of benefits that you can build up in a defined benefit pension scheme each year for tax relief purposes.

Taxpayers can pay in up to 100% of their income, up to an annual allowance of £40,000. Any contributions you make over this limit won’t attract tax relief and will be added to your other income, being subject to Income Tax at the rate(s) that applies to you.

Your annual allowance will reduce from £40,000 if your income plus your pension contributions totals £150,000 or more. For every £2 in excess of £150,000, your allowance will reduce by £1, until it reaches a minimum allowance of £10,000.

Carry forward unused allowances
You can also carry forward unused allowances from the previous three years, as long as you were a member of a registered pension scheme during this period.

If you choose to take a taxable income from a personal pension other than via an annuity, your annual allowance will be reduced to £4,000 or 100% of earnings, whichever is lower, and you won’t be able to carry forward previous unused allowances.

Paying tax on the excess
As well as the annual allowance, there’s also a maximum total amount you can hold within all your pension funds without having to pay extra tax when you withdraw money from them, known as the ‘lifetime allowance’. The standard lifetime allowance is £1,030,000 (2018/19), but some people have a higher allowance. The standard lifetime allowance is inflation linked, so it’s likely to increase each year.

If the value of your pension savings is higher than this, and you have not secured protection from HMRC against the changes in the lifetime allowance at the point that they reduced, you will pay tax on the excess. So, if you’re approaching this limit, be careful about contributing too much.

There’s no immediate tax charge once your pension fund grows beyond your lifetime allowance. It’s only when you choose to take your pension benefits over your lifetime allowance that you pay a tax charge, and the charge only applies to the benefits taken over your allowance.

Freedoms give greater flexibility
Commencing 6 April 2015, under the new ‘pension freedoms’ rules, you can now access your savings from your defined contributions pension scheme once you reach age 55. You cannot make withdrawals from a pension before you’re 55, moving to 56 in 2019 and 57 by 2028. If you’re due to reach retirement this year, you could take up to 25% of your pension fund as a tax-free lump sum if you want to, but the remaining 75% will be liable to Income Tax.

Previously, most pensioners purchased an annuity with their pot, which paid a guaranteed income for life. The pension freedoms give greater flexibility over retirement funding. But you’ll need to plan any withdrawals you make carefully, as taking large sums from your pension can boost your income in a particular tax year, pushing you into a higher rate of tax so that you pay more tax than you need to.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.