Kids Pensions - tax efficient

consequences

This seems in my mind a no brainer, but of course I may well be narrow minded.

I wish to set something up for my kids. I dont wish to take the road of savings in their name which they automatically obtain at 18.
That really leans us towards inheritance at some point in the future or a pension in their name.

But then I thought what about from my pension. Still many years to go until I can take it, but at that point with the option to take out 25% tax free, it would seem a no brainer - that again.
If for the sake of argument, I then wanted to give that 25% to them, as long as I live long enough for IHT rules they wont have to pay tax on it ?
It is considered a cash gift even if I pay directly into the pension as it must be setup in their name?

If put into their pension regardless of it coming out of mine tax free; then it should also get a 20% bonus for tax relief too?
This seems at face value a better route than taking money from my salary after tax and putting it into their own pensions now.

Leaving the money in mine (salary sacrifice) then transferring tax free, plus 20% tax relief.
No mortgage, expect to do draw down. 
Annual Allowance I assume starts from when you first put into a pension, not from 18yrs old, so they would be able to use up to 3 previous years as it is their allowance?
What am I missing ?

Thanks !

Dazed_and_C0nfused

You don't get any pension tax relief with salary sacrifice.

If you sacrifice £100 then normally £100 ends up in your pension.

You have avoided paying tax and NI on that £100 but that is a personal tax savings.

If you pay £100 into a RAS scheme you will have a pension fund of £125 with the basic rate pension tax relief added on.

dunstonh

It is considered a cash gift even if I pay directly into the pension as it must be setup in their name?

Correct.

If put into their pension regardless of it coming out of mine tax free; then it should also get a 20% bonus for tax relief too?

Tax relief is not a bonus.  It is a reduction.   However, you would be limited to their pension allowance.   For young children, that would likely be the non-earners limit of £3600.

This seems at face value a better route than taking money from my salary after tax and putting it into their own pensions now.

Actually, that is probably be the best way as the low earners limit wont be as much of an issue and gifts from income are not included in your estate.

Albermarle

I think what you are maybe missing is for your adult child to get tax relief on pension contributions, they have to be earning a sufficient amount.
For example if they were only say working part time and earning £5000 pa, the maximum they could add would be £4000 ( + £1000 tax relief). The source of the money ( you in this case) is irrelevant.

This always applies, regardless of annual allowance rules. You can only carry forward unused annual allowance, if you have sufficient earnings to make use of it. So for example you can not put £60,000 in a pension if you are only earning £30,000.

If they were not earning at all the max they can add is £2880 ( + £720 tax relief) 

consequences

Dazed_and_C0nfused said:

You don't get any pension tax relief with salary sacrifice.

If you pay £100 into a RAS scheme you will have a pension fund of £125 with the basic rate pension tax relief added on.

Yes, sorry, it's the way I'm looking at it.
Paying into a pension via salary sacrifice is saving me from paying any tax on those earnings.
Thus I consider it as free of tax, which is not the same as tax free.

dunstonh said:

However, you would be limited to their pension allowance.   For young children, that would likely be the non-earners limit of £3600.

Actually, that is probably be the best way as the low earners limit wont be as much of an issue and gifts from income are not included in your estate.

£3600. See, there is the catch, thanks!
Unless they are earning much more than that at the time and it is put into their fund over a few years.
Or else more options through splitting something between a pension and say a gifted deposit for a house.

eskbanker

consequences said:

What am I missing ?

You're seeing the tax relief on contributions into the kids' pensions but bear in mind the later taxation on the way back out again - if the rules are the same for them later this century then they'd be able to access 25% tax-free but would be taxed at their marginal rates on the rest, so that basically wipes out 75% of that tax benefit....

consequences

eskbanker said:

You're seeing the tax relief on contributions into the kids' pensions but bear in mind the later taxation on the way back out again - if the rules are the same for them later this century then they'd be able to access 25% tax-free but would be taxed at their marginal rates on the rest, so that basically wipes out 75% of that tax benefit....

More intrested in setting them up with one less thing to worry about as they start a life likely full of debt.

LV_426

consequences said:

eskbanker said:

You're seeing the tax relief on contributions into the kids' pensions but bear in mind the later taxation on the way back out again - if the rules are the same for them later this century then they'd be able to access 25% tax-free but would be taxed at their marginal rates on the rest, so that basically wipes out 75% of that tax benefit....

More intrested in setting them up with one less thing to worry about as they start a life likely full of debt.

They absolutely do. My aim is to pass on my financial breaks by giving them a substantial house deposit from my pensions, most of which I won't be using, if all goes well.

eskbanker

consequences said:

eskbanker said:

You're seeing the tax relief on contributions into the kids' pensions but bear in mind the later taxation on the way back out again - if the rules are the same for them later this century then they'd be able to access 25% tax-free but would be taxed at their marginal rates on the rest, so that basically wipes out 75% of that tax benefit....

More intrested in setting them up with one less thing to worry about as they start a life likely full of debt.

If you're concerned about debt then prevention might be better than cure, i.e. avoiding debt in the first place would be a better solution for many than having the wherewithal to pay it off at 60(ish)....

consequences

One can lead a horse to water but one cannot make it drink.
Which is also why I dont wish to pay into a JISA and hope they wont blow it at 18.
With the best will in the world, we bring up our children a certain way, but, there are many outside influences so we never know what they may turn into, or what kind of career they may have.
For the youndsters today, debt is inevitable.

Marcon

consequences said:

One can lead a horse to water but one cannot make it drink.
Which is also why I dont wish to pay into a JISA and hope they wont blow it at 18.
With the best will in the world, we bring up our children a certain way, but, there are many outside influences so we never know what they may turn into, or what kind of career they may have.
For the youndsters today, debt is inevitable.

A mortgage, yes - but otherwise not inevitable at all. If parents take debt for granted in respect of their children, and pass on that message/mindset to their offspring, then you are substantially increasing the likelihood of just such an outcome.