How to ensure annual allowance is fully utilised

leosayer

I assume your son is in his early 20s. That means he won't be able to access pension savings for at least 35 years.

At some point isn't he likely to need funds for rental deposit, house purchase deposit or just emergency funds if he loses his job?

Unless he already has these then I think it's sensible to limit his pension contributions to a more reasonable number (10%) and focus on ISAs and normal cash savings.

kimwp

I think your son needs to do two things-
1. Think about his life goals. Yes, saving onto a pension is a good idea, but there are also other things to save for - car, rental deposit, house deposit, furniture, white goods, kiddie paraphernalia, which, if needed, will likely before his pension is available.
2. Regarding pension (IE money that is locked away until later in life), consider the tax and NI.
For example, LISA: 25% contribution from government, no tax to withdraw for house or after 60. So, at contribution - if the money comes from a wage where basic 20% tax was paid, this was gained back, but the NI wasn't. However no tax when withdrawing for a house (bearing on mind the restrictions) or over 60. For a salary sacrifice pension, in the same tax bracket, 20% tax not paid, NI not paid - at withdrawal, if also receiving a state pension and tax free lump sum already taken , 20%+ tax on withdrawal, though no NI. It can get really complicated given all the scenarios, particularly this far from drawing his pension, so he will have to make some assumptions and reassess these over time.

BikingBud

DRS1 said:

Whenever I read about someone planning to contribute 100% of their earnings to a pension I wonder what they are going to live on.  Fresh air?  OK as mentioned above most are nearer retirement and have other savings to fill the void but the OP's son?

Maybe it would be better to get him used to managing on his own - eg charge him rent energy costs food and other bills.  Get him used to handling his own finances so he is prepared for when he moves out.

But if they are contributing all their income to planning for their future then they are engaging and managing.

If I am able to give them headroom and freedom to do that by continuing to provide domestic support is that not better than me building up a massive pot that may be subject to a variety of taxes and other deductions before they get any benefit downstream?

If they want to squander all their income I am not a hotel but if I offer continued support, they get used to saving, compounding takes place and growth is set up for the future.

At some point with better jobs and increasing income they become more independent but the compound benefits are baked in.

Win win?

badmemory

I subsidised my son when younger.  Just as long as they know that you are housing them free in exchange for them contributing to their pension.  They should also be aware of just how much they are not paying for.  Eventually he will move out & he should at least have some idea of how much reality will cost.

According to Martin a pension of 9% is only sufficient starting at 18.

hugheskevi

According to Martin a pension of 9% is only sufficient starting at 18.

I think the pension and tax regime has been made so complicated that not engaging strategically to maximise incentives can be very expensive. The big rewards from a pension come when:

• There is an employer match
• You have access to salary sacrifice, especially if the employer shares some or all of the employer NI saving
• You pay higher or additional rate income tax, especially if you can recover some or all of tapered Personal Allowance (taxable income of £50,270+)
• You can recover some or all of means-tested Child Benefit (adjusted net income of £60K+)
• You can recover free childcare (adjusted net income of £100K+)
• In receipt of other means-tested benefits or contributions affects children's university grant and loans - probably going to be more niche circumstances that not many can really exploit.
• You can withdraw all the contributions tax free, eg, LGPS AVC contributions.

Putting money into a pension when none of these incentives apply could be an expensive mistake. A stocks and shares ISA can be used as a home for the money if none of the incentives apply, leaving it there until one or more of the incentives apply, then increasing contributions from salary and using the ISA to supplement funds (so essentially moving the money from the ISA to the pension).

With the incentives to make pension contributions getting stronger at £50K, £60K, and £100K of income (which with fiscal drag are getting ever closer to average salary, so many will encounter them at some point in their working life), waiting to contribute extra until those income levels are reached may well result in a significantly better financial outcome. The ISA and the pension are likely to be able to be invested in the same things at the same charge, and as the growth in the ISA can then be used for more tax relief on future contributions, there is no benefit to getting the money into the pension early to benefit from compounding (aside from maybe protecting against policy change risk) when none of the big incentives apply.

squirrelpie

Dazed_and_C0nfused said:

Does he get paid on the 5th of each month and only get his payslip retrospectively?

"Payslips must be provided on or before payday." https://www.gov.uk/payslips

DRS1

BikingBud said:

DRS1 said:

Whenever I read about someone planning to contribute 100% of their earnings to a pension I wonder what they are going to live on.  Fresh air?  OK as mentioned above most are nearer retirement and have other savings to fill the void but the OP's son?

Maybe it would be better to get him used to managing on his own - eg charge him rent energy costs food and other bills.  Get him used to handling his own finances so he is prepared for when he moves out.

But if they are contributing all their income to planning for their future then they are engaging and managing.

If I am able to give them headroom and freedom to do that by continuing to provide domestic support is that not better than me building up a massive pot that may be subject to a variety of taxes and other deductions before they get any benefit downstream?

If they want to squander all their income I am not a hotel but if I offer continued support, they get used to saving, compounding takes place and growth is set up for the future.

At some point with better jobs and increasing income they become more independent but the compound benefits are baked in.

Win win?

All perfectly valid considerations from the point of view of a parent - it is after all your job to look after your kids.  Though if you are paying their way then I am not sure what exactly they are managing.  And I have no idea what "engaging" is.  If they do something because you tell them to it is not something they are doing because they think it is a good idea.  If it is a habit which is going to stick it has to come from within them not be imposed on them by someone else.

Personally I think the best gift you can give your kids is to teach them to stand on their own two feet.

BikingBud

Engaging to me means taking active steps, doing things off their own backs. Working out budgets, expenditure and exploiting best routes for surplus cash to grow. Simple things like saving at least 50% of any pay-rises because at some point they will need a lump of money, for something, for anything, for everything.

I have already mentioned if they treated it like a hotel and squandered all their cash then support would not be provided. But if they explain their plan and demonstrate that they are able to save, for their own deposit or start a pension then why would I sit on cash building a larger pot when I could assist now and feed and build their long term financial security. 

As a youngster I took money to the Yorkshire bank at school every week with my passbook and saw it grow, the habit starts young. We did similar with ours from a very young age, birthday money, part time jobs etc builds the funds early and the magic takes over. When they wanted laptops or new phones, they paid half, I paid half they know that things don't come easy, they value what they paid for. Habits have to be formed, grown and nurtured, few will see it without prompting but they get it.

They didn't go straight to Uni and get on the debt train but have found jobs, got experience and are now doing degree level courses paid for by employees. So perhaps already £50k each better off than some of their peers.

They stand on their own feet very well thanks but this is not a silver spoon.

Too many here will die with too much and it will be too late to do anything other than wave goodbye as the jolly taxman comes along to ream your estate. We see it daily where people are trying to shelter what they could have released for much greater benefit, much better effect, much earlier.