The end of the tax year is a good opportunity for advisers to reinforce their value to clients, especially when it comes to intergenerational planning.
As ageing baby-boomers look for ways to pass on their wealth, demand for intergenerational planning is likely to grow – and a junior pension is one of the simplest ways clients can pass on their wealth, mitigate their inheritance tax (IHT) bill and help a loved one grow their savings.
Every child is eligible for a pension from birth. Although plans are required to be taken out in the child’s name, anyone can contribute – grandparents, parents or other relatives.
Family members can invest a maximum of £3,600 a year and, with 20% tax relief, that would only cost £2,880. If this contribution is from an IHT-able estate using the annual IHT exemption or normal expenditure out of income, there would in essence be 60% overall tax relief – that is, 20% at source and 40% IHT saving on death.
By making this gift when they are alive, £3,600 in a pension is worth 108% more than had a sum of £2,880 – less IHT (that is, £1,728) – just been left on death, plus any growth. To illustrate the point further, the table below shows what the potential value might be after 50 years’ growth based on various contribution levels and methods.
|Contribution, plus tax relief (max £60pm)||Value at 4% pac (after charges)*|
|One-off £2,880 = £3,600 gross||
|3 years of one-offs = £10,800 gross||
|£250pm for 25 years = £310pm gross||
|£1,000pm for 18 years = £1,060pm gross||
Note: * value assumes contributions are made in the early years and continue to grow thereafter
Source: Zurich UK
Some clients might be worried about giving away their wealth during their lifetime – typically because of concerns about tax, running out of money or a lack of control. In this scenario, however, gifts can be reviewed as they are made monthly or annually, are very tax-efficient and control comes in the form of legislation, which currently means the beneficiary cannot access the pension until at least age 55.
For a complete belt-and-braces approach to retirement, clients could also invest in a junior ISA until the age of 18, when the beneficiary could subsequently invest it in a pension. And the individual could have an adult cash ISA from the age of 16.
Finally, clients could also gift up to £4,000 a year to put into a Lifetime ISA, which would receive a 25% government bonus. This would again be tax-efficient and provide control, as it could only be used towards a first property purchase or for retirement from the age of 55.
For advisers, a junior pension gives them an opportunity to start building a relationship with the next generation of clients. Having grown up, these individuals may need advice on university fees or loans, workplace pensions, mortgage protection and, of course, the pension their family member contributed to.
Intergenerational planning not only makes sense for clients, but advisers too – especially as the value of a business that encompasses multiple generations will be much higher than one where the core client bank is in retirement.
So, with the tax year-end approaching, now might be the time to talk with clients about using their available pension and ISA allowances. By doing so, advisers could help secure the future of their clients’ heirs – and that of their own business too.
Andy Woollon is wealth specialist at Zurich UK