As families struggle to evade the inheritance tax crackdown, under-18 pensions are on the rise

As parents and grandparents increase their gifts to protect their loved ones from inheritance tax bills, the number of children with pensions has increased

Recent data has revealed that more families are transferring wealth to younger generations through children's pensions, avoiding inheritance tax.

According to HMRC's most recent data, pension contributions for under-18s increased to 79.6 million in the year ending April 5, 2023, from 75.9 million the year before as well.

According to data acquired by Lubbock Fine Wealth Management, the number of young people saving for pensions increased from 42,000 to 45,000 during that time.

The increases indicated a growing wealth transfer from parents and grandparents to their children and grandchildren as they contribute to their pension funds.

The director of Lubbock Fine Wealth Management, Andrew Tricker, stated: "Parents are increasingly viewing those pensions as an inheritance tax tool, which is why contributions for minors are increasing.

More clearly, it's a good way to get your own child's pension fund off the ground. People frequently begin their pensions too late in life, which means they lose out on a significant amount of compounding.

A Junior Sipp: What is it?

A Junior Self-Invested Personal Pension (Sipp) is a tax-efficient way for children under the age of eighteen to save money, and it can be set up for them by their parents or legal guardians.

Any adult can then make an annual contribution of 2,880 to the child's pension, which, after accounting for the 20% tax relief, increases to 3,600. When the youth reaches the age of 18, they once again have control over the Sipp.

According to Hargreaves Lansdown's calculations, a Junior Sipp who received the entire amount from birth could have well over 80,000 by the time they are eighteen. When paired with savings in a Junior ISA, the child could become a millionaire before turning forty.

Since the money can grow tax-free, it is common for parents to give money to their children by transferring it to their pension pot. Additionally, the money is less likely to be used for general expenses when it is invested in a pension that cannot be accessed until the individual is at least 57.

Inheritance tax should not apply to gifts given to children and grandchildren, including Junior Sipps, after seven years.

Pension inheritance.

According to the 2024 Budget's announcements, pensions will no longer be exempt from inheritance tax as of April 6, 2027. According to experts, this could hasten the trend of grandparents and parents withdrawing funds from their own pensions to contribute to their children's pensions.

"As inheritance taxes increase, families are searching for methods to lower their IHT obligations. Contributions to children's pensions are viewed by parents and grandparents as a practical means of lowering the size of their estate while simultaneously preventing their heirs from spending their inheritance too soon," Tricker said.

"Even modest contributions for children today can compound into meaningful savings by the time they reach retirement age, thanks to decades of tax-free growth," he continued.

Hargreaves Lansdown calculated that if the young person contributed the full 2,880 annually from birth, they could have about 420,000 by the time they were 60, even if they didn't make another contribution to the Sipp after the age of 18.

According to Helen Morrissey, retirement specialist at Hargreaves Lansdown, "the possibilities are endless if they kept making contributions throughout their working lives."

This is quite helpful because their peers won't even begin saving for retirement until four years later through auto-enrollment at age 22.

According to Tricker, "One of the last valid tax havens for family wealth is a pension. Pensions are an effective estate planning and intergenerational wealth transfer tool when used properly.

Families are becoming more aware that significant portions of their wealth will wind up in HMRC's coffers if they have the resources but choose not to contribute to their children's pensions.