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Funding Children’s/Grandchildren’s Pensions Combined with Inheritance Tax Savings

Funding Children’s/Grandchildren’s Pensions Combined with Inheritance Tax Savings

We do not need income but want to pass our pensions on to our family efficiently for their longer term benefit.

Client Circumstances:

  • Mr and Mrs Thorpe are Aged 70.
  • They have one daughter and 3 grandchildren (aged 6, 8 and 10).
  • They want to save for their daughter and grandchildren’s long term future.
  • Their pension values are £300,000 and £400,000.
  • They have combined estate of £1.8m.
  • They do not wish to gift any capital.
  • They do not need additional income.
  • They wish to retain their lump sum entitlement.
  • Death benefit of pensions, post 75, will be significantly reduced.

Recommended Solutions:

  • Take 25% Pension Commencement Lump Sum, (PCLS) now.
  • Convert pensions to Drawdown.
  • Draw pension income.
  • Set up Stakeholder Pension at £2,880 pa net (grossed up to £3,600) each for daughter and grandchildren.
  • PCLS to be invested in IHT efficient scheme (see other example case studies).

Benefits from advice given:

  • Gifts into children’s/grandchildren’s pensions exempt for IHT purposes immediately (no 7-year rule).
  • Daughter and grandchildren are unable to touch funds until they are at least age 55.
  • Can stop contribution at any time if income is not sufficient.
  • Daughter and grandchildren will be able to contribute to plans at later age.
  • May be able to pay more into daughter’s pension (if she is working).
  • Total pension contributions over 10 years of £115,200 net.
  • IHT saving (without growth) of £46,080, so net cost effectively £69,120.
  • Total IHT saving at 10 years of £76,070.
  • Approximate future total pension values after 10 years £190,177 (assuming 5% growth) to provide benefits for when they take retirement.
  • Helps to reduce future growth in their estate.
  • Invested PCLS IHT exempt 2 - 7 years.
  • Increased value passed to beneficiaries approximately £224,506 (see overleaf).

Position 10 Years time post 75

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Future Servicing

We will look to carry out a regular review of your circumstances, objectives, needs and portfolio performance to ensure all arrangements continue to be suitable and advise of any changes that may be appropriate.

This example is for illustrative purposes only, based on current legislation and tax allowances. Tax rules and regulations are subject to change.

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