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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
There has always been an element of ‘looking after number one’ when it comes to pensions. Plans come in different guises but, essentially, they work in the same way allowing you to save into a tax-efficient pot that eventually provides your income in retirement.
That, at least, has been the traditional way of thinking. But broaden your ideas about pensions and, according to financial planning experts, it’s possible for them to help build wealth across different generations within your family.
With significant changes coming to inheritance rules in April 2027, there’s never been a better time to think about pension planning beyond just your own retirement. Providing they fit in with your financial circumstances, here are three options to consider.
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The great wealth transfer is underway with up to £7 trillion expected to pass between generations over the next 30 years, according to experts. Most people pass money on after death and can face a significant tax bill in the process. But pensions professionals suggest there is a smarter way to build inter-generational wealth.
According to them, clever use of pensions can reduce an inheritance tax bill, give your adult children a valuable, tax-efficient helping hand, and potentially set up your grandchildren to be millionaires by the time of their own retirement.
Defined contribution pensions, whether in the form of an auto-enrolled workplace pension or self-invested personal pension (SIPP), are the most tax-efficient savings option you have.
You get tax relief on the money you pay in, the plan grows tax-free while it is being invested, then you can access up to 25% of the proceeds tax-free when you retire. But for too long we’ve only thought about the advantages of a pension for our own financial wellbeing, or perhaps our spouse’s.
Those tax benefits are available to everyone no matter what their age. So, as many of us look for ways to pass money down to our children and grandchildren, using a pension can maximise those tax advantages: if it makes financial planning sense to do so.
That last point is important. Everyone’s circumstances are different, so what could suit one family might not apply to another.
Maike Currie, vice president of personal finance at PensionBee, says: “Grandparents are increasingly becoming the ‘bank of family’, helping younger generations facing a far tougher financial landscape than the baby boomers experienced.
“Pensions can be one of the most powerful and overlooked ways for grandparents to help. A pension contribution made for a child or grandchild benefits from immediate tax relief.
“Over decades, that money benefits from tax-free investment growth and compounding, potentially turning relatively modest gifts into substantial long-term wealth.
“It is also one of the few gifts where time is arguably more valuable than the amount itself. A contribution made for a child or teenager has decades to grow, making early pension gifting extraordinarily
Many young and middle-aged adults struggle to make significant pension contributions themselves.
With other commitments swallowing their wages - from paying off their former student loans to the financial strains on everyday life such as childcare requirements and mortgage repayments - little is left for their own pension. A recent report by the Pensions Commission found that 45% of working-age adults were not saving into a pension at all.
This is where an early inheritance can help. Covering an adult child’s pension contributions, while they themselves are effectively on parental leave, can help them avoid falling behind with their own retirement savings.
Similarly, helping with pension contributions for a family member busy paying off their student debts can make a huge difference to their finances in later life.
Before you help an adult with their pension contributions make sure they aren’t maxing out their annual allowance. Most people can pay the lower of either their annual income or £60,000 into a pension each year – that includes employer contributions and tax relief.
You can also pay up to £3,600 (including tax relief) into a non-earning adult’s pension. You can also carry over any unused pension allowance from the past three years, provided the total amount you pay into the pension doesn’t exceed what they earn in a year.
Let’s say you gift your child £32,000 and they pay it into their pension. HMRC will immediately turn your gift into £40,000 with £8,000 basic rate tax relief. If they are a higher rate taxpayer, they can claim the additional tax relief via their tax return.
Assuming the child is 40, and they achieve 5% annual investment growth, that could grow to just shy of £66,000 by the time they retire at 68. This assumes an annual inflation rate of 2.5% and that the pension charges 0.7%pa. Leave these factors out of the calculation and the final amount rises to £157,000.
Children, and anyone who isn’t earning, can have a pension and contribute up to £2,880 a year. They will receive basic rate tax relief taking that contribution to £3,600. It can then grow tax-free until they retire.
“In the case of a child, if you contributed the maximum each year from birth to age 18, the pot could be worth close to £100,000, assuming 5% investment growth a year,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“Left untouched, it could be close to a whopping £1 million by the time the child turns 65.”
As the name suggests, a Junior SIPP is like a SIPP but aimed at the under-18s. You need a parent or guardian’s permission to open a Junior SIPP, and they would control it until the child turns 18, when it becomes theirs. But they wouldn’t be able to access the money until they hit pension age – whatever that may be in decades to come.
Putting money into your children and grandchildren’s pensions can also be beneficial for your own tax bill. Frozen tax thresholds and rising inflation mean more families are facing inheritance tax bills. One way to reduce your estate is to gift money in your lifetime.
“Gifting to loved ones is a great way of helping them meet their financial goals while also potentially helping reduce inheritance tax bills,” says Morrissey.
“You get the benefit of seeing them make the most of your gift now rather than waiting to get it in your will and you can also see how they deal with the gift you have given. This may inform your future gifting strategy to them in the future.”
You can give away up to £3,000 a year and it is immediately exempt from IHT, but larger gifts would still be pulled into your estate valuation for tax purposes if you die within seven years of giving them.
Another option is gifts out of excess income. Provided you can prove you don’t need the money, and you give it regularly, this is free from any threat of inheritance tax. So, you could gift £240 a month into your grandchild’s Junior SIPP, giving them an annual pension contribution of £3,600 without using any of your IHT gifting allowance.
Currie says: “In an era where younger generations are juggling property costs, record high unemployment and the shift from guaranteed pensions to investment-based retirement saving, helping children and grandchildren build pension wealth early may prove one of the most valuable intergenerational gifts of all.”
It’s one of the biggest retirement decisions you’ll make. Here’s how to get it right.
Learn how to manage your income, use allowances, and plan withdrawals to cut your tax bill.
Find out when buying an annuity might help reduce inheritance tax.
