Two-thirds of savers are unaware that they can pay money into someone else’s pension, according to new research.
Contributing to a loved one’s pension can help reduce the gender pensions gap and provide a loved one with a more comfortable retirement.
Couples, friends and relatives can pay into each other’s pension pots, while parents and grandparents may like to contribute to a child’s pension.
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But a survey of 2,000 people by wealth firm Hargreaves Lansdown found only 34% know you can pay into the pension of a partner.
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Younger people were more aware, at 43% of those aged 18-34, compared to just 25% of those aged 55 and over.
Most (78%) additional rate taxpayers knew about the partner’s pension perk. This compares to 61% of higher rate taxpayers and 29% of those paying basic rate tax.
We look at ways to boost your pension in a separate article.
Compound interest and tax relief can turbo-charge even small contributions made into a friend or relative’s pension pot. For example, five payments of £2,880 could provide that person with an extra £61,000 at age 67.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: “The ability to pay into a partner’s pension is a little-known benefit that can make an enormous difference to your family’s retirement planning.”
We look at how the rules work in terms of adding to someone’s pension, and how the contributions can add up over time.
Why contribute to someone else’s pension?
Paying money into someone else’s pension is known as a “third-party contribution”. They can be a useful financial planning tool, particularly if that person has not managed to build up much retirement savings themselves.
This could be because they have taken a career break, such as to raise young children or care for elderly relatives.
Laura Barnes, director of business development at Nucleus, an investment platform, says third-party contributions appear to be a “closely guarded secret” due to so many people not knowing about them.
She comments: “Generally speaking, a greater number of women could see their retirement prospects improve if the family unit considers third-party contributions. Often caring roles have fallen to women in the past and this has impacted their earning power either because of working part-time or giving up work entirely.
“If these women were to receive pension contributions from a partner it could go some way to reduce the gender pensions gap,” she added, which government figures show is 48% among those approaching retirement, leaving women with thousands of pounds less each year.
Research from Nucleus found that 24% of men who did not know about third-party contributions said they would consider making them, compared to 19% for women.
Parents and guardians can also set up a pension for a child to give them a head-start for saving for their future. Other family members, such as grandparents and aunts and uncles, can contribute once the pension is open.
Mark Barlow, chartered team member at Equilibrium Financial Planning, comments: “Whilst planning for your children’s retirement may seem like an unnatural move, they are effectively a long-term savings plan.
“Considering young people believe that they will never be financially secure, the significant tax advantages provided by pensions could minimise financial pressures by enabling them to focus on their immediate challenges, rather than struggling to acquire additional savings for the future.“
Calculations by Hargreaves Lansdown show that making contributions of the full £3,600 allowed to be put into a junior Sipp per year could give the young person a pension pot of £104,000 by the time they are 18. This puts them well ahead of their peers who are yet to be auto-enrolled. Overall, this early planning could leave them in a much better position.
Morrissey said: “A junior Sipp can be a great way of starting your child’s financial education journey. You can show them how their Sipp is growing and the companies they are invested in. It can really help them get to grips with investment and start a lifelong habit that can serve them very well.
“Having built up a decent pension through their junior Sipp can also give them a bit more space in their budget to save for other key milestones such as a car or first home and help them build their financial resilience overall.”
Separate research by Bestinvest reveals that paying the maximum amount into a pension and also a junior ISA for a child from when they’re a newborn baby until age 18 could turn the child into a millionaire before they hit 40.
As well as boosting a loved one’s retirement nest egg, gifting money into someone’s pension could help reduce a potential inheritance tax liability.
How much can I contribute to someone’s pension?
The rules allow for up to £2,880 per tax year to be paid into a pension of a non-earning person. Tax relief of 20% tops up the amount to £3,600.
So, this amount could be added to a child’s pension, or a non-working spouse, for example.
Pension contributions can also be made if the partner is working, providing the amount remains below their annual pension allowance.
This is £60,000 for the current tax year. However, very high earners have a smaller annual allowance.
The tax relief is based on the recipient’s tax position, rather than the person contributing to the pot.
Make sure you’re aware of anyone else paying into the pension so you can maximise the tax relief and you don’t accidentally breach the allowance.
Normally it’s not possible to open a pension scheme for someone else - the other person will need to open it themselves. Once open, you can contribute.
However, with children’s pensions, the legal guardian sets up the scheme, rather than the child.
How much could I boost someone’s pension by?
Third-party contributions can be made in different ways. You may like to pay in a lump sum, for instance, or set up a regular monthly payment of say £100.
If no-one else is paying into the pension – perhaps it’s your spouse’s pension and they’re not working, or a grandchild’s pension – you could try and aim to pay in the full amount of £2,880 each tax year, if you have enough cash.
If you did this for five years in a row, making five payments of £3,600 (including tax relief) into someone’s pension from age 35, this would provide them with an additional fund of approximately £61,000 at age 67, according to Nucleus.
This assumes growth of 4% a year net of charges. Taken as an annuity, this could look like an extra £4,000 for life in retirement.
So, an additional £61,000 at retirement (or £4,000 a year) would have cost the person contributing to the pension just £14,400.
As Barnes puts it: "Shouting more loudly about third-party contributions could be a step in the right direction.
“There’s work to be done to increase awareness and to make this secret common knowledge.”
