With thousands of students due to begin university next month, parents will be thinking about how best to support them − particularly given how expensive student debt now is. However, helping your children out with tuition fees might not be the best way forward. Instead, you might look at setting up a pension for them.
Think about this and you will see how it makes sense. Student loans don’t have to start being repaid until the student is earning £21,000 and it is increasingly clear that the majority of students will have them written off (this is automatic after 30 years, moreover), long before they get anywhere close to paying them off. Forking out for your children’s tuition fees or covering their loans may therefore turn out to be entirely financially inefficient.
Paying into a pension for them is a different matter. Everyone of any age is entitled to make – or have made for them – pension contributions of up to 100% of their earnings or £3,600 every year – whichever is the highest (up to a £40,000 limit). Most providers will take much less (even £25 a month) and you will get a nice slug of tax relief (20%) on any contributions – so you only need to pay in £2,880 for them to get the £3,600. But put in the maximum for your children and the numbers start to look good pretty quickly.
Put in the full amount every year and even if the children contribute nothing else at all to their pensions until they retire, a 5% return over the following 35 years will give them a starter pension pot of more than £60,000.
They won’t be able to access that pot until they are at least 55 – or possibly 60 given the government’s intention to shift the private pension access age in line with the rise in the public pension age. However, that at least means it won’t be instantly wasted (sometimes a concern if you are making Jisa or Isa contributions for your children) and it might take some pressure off them when they are struggling to pay rent, save up a deposit to buy a house and eat in their 20s. Other people have already done these sums – and not just for university age children: HM Revenue & Customs says around 60,000 under-18s already have their own pensions.
How to make their Sipp grow
Contribute to a self-invested personal pension (Sipp) for your child for only the few years they are at university and you could make a major difference to their living standards in later years. But do it on a very regular basis and you could make them rich.
If you put in the full £3,600 from birth to the age of 55 and get a return of 7% a year (this is quite a generous assumption, by the way), thanks to the magic of compounding your kid will end up with a pension fund worth £2.35m before charges. Get an average net return of 6% after charges and the pension pot would be worth £1.56m by age 55.
Note that this sum is above the £1m lifetime limit currently imposed by the government on pension savings (you pay an effective income-tax rate of 55% when you withdraw anything over that limit).
Advisers also point out that pension contributions to children can be a useful estate-planning strategy. For example, a couple making an annual contribution of £2,880 to each of two children’s pensions would be able to do so using their annual gift allowances of £3,000 each, exempting the money from inheritance tax.
Tax tip of the week
You can reclaim tax you pay on fees or subscriptions to certain approved professional organisations, such as the National Union of Teachers or the Solicitors Regulation Authority. But this only applies where membership is required for your job, or is helpful for your work, says HM Revenue & Customs (HMRC) – see the list of “professional bodies approved for tax relief” on Gov.uk.
You cannot reclaim tax on fees or subscriptions that you have paid to professional organisations not approved by HMRC, or for life membership subscriptions or fees that you haven’t paid for yourself. How much you can claim back depends on both your income-tax bracket and the particular arangement between the professional body and HMRC.
Hang up on pensions cold-callers
Despite repeated attempts to crack down on pension-related scams, they just keep coming: new figures from the charity Age UK suggest that as many as two-fifths of older people have been targeted by conmen.
You can see why. As the Financial Conduct Authority warnings on the matter note, the pensions freedom reforms of 2015, which allow savers to withdraw as much of their pension as they like whenever they like, offer fraudsters a particularly tempting opportunity.
But the problem is not just the fraudsters. It is in the lack of awareness among the elderly, says Age UK. Those most likely to end up losing their savings to the smooth- talking scammer are the single (who have no one at home to talk them out of it) and the over-75s (who may be less likely to see the FCA’s warnings).
All this should work to strengthen the case of campaigners pushing for a blanket ban on cold-calling by anyone selling pension or investment products, legitimate or not. In the meantime, if you get a cold call related to pensions, just hang up – and tell any elderly friends and relations to do the same. Getting into conversation simply isn’t worth the risk.