In a cost of living crisis it can be tempting to forgo saving for the future, and instead prioritise current demands.
One in five pension schemes (19 per cent) surveyed by the Pensions and Lifetime Savings Association in September saw savers ask about reducing or stopping their pension contributions. And 12 per cent said they saw members wanting to opt out.
As people assess how to cut back to meet rising costs, some are also receiving help from family. A survey from LV in June found that two in five adults (39 per cent) had helped family or friends financially earlier in the year, mainly on day-to-day costs and bills.
On the other hand, third-party pension contributions could be a way for people to help their family with longer-term financial needs, especially where pension saving has been compromised to meet the cost of living.
Besides Junior SIPPs, third-party contributions can be a way for people to continue, or begin, to contribute to a relative’s retirement savings when the relative reaches adulthood.
In terms of who could most benefit from receiving these third-party contributions, parents or grandparents – who may have excess income – could make pension contributions for working children or grandchildren whose earnings justify them, says Andrew Tully, technical director at Canada Life.
Even if the younger generations are higher-rate taxpayers, he highlights the possibility that they may not have enough income to make large, regular pension contributions due to outgoings such as mortgage repayments, childcare costs or school fees.
As well as benefits to the pension saver, third-party contributions can be a tax-efficient way of cascading wealth down the generations, by reducing the donor’s estate for inheritance tax purposes, Tully adds.
But despite the potential benefits third-party contributions can bring both the pension saver and the benefactor, he says it is an area of financial planning that is not used as often as it could be.
Andy Gillett, director and head of wealth management advice at BRI Wealth Management, agrees that third-party contributions tend to be overlooked by both clients and advisers.
“They can be a great way of funding pensions, with the pension holder getting the tax relief both at source and through their tax return, if applicable,” he adds.
Although third-party contributions are often implemented for children, Gillett says they are just as effective for older clients. He provides the example of a homemaker who perhaps has no income, but could receive a third-party contribution of up to £3,600 a year with tax relief.
“Individuals whose incomes are between £100,000 and £125,140 are also likely to find receiving a third-party contribution hugely beneficial, as they can reclaim some or all of their personal income tax allowance and benefit from an effective tax relief of 60 per cent,” Gillett says.
Third-party pension contributions can also be tax efficient for the benefactor. But it is worth bearing in mind that contributions are ultimately a gift, and so they need to be considered alongside inheritance tax exemptions, reminds Damien Bowler, pensions technical manager at Curtis Banks.
