One reader needs help starting a pension for his 22-year-old grandson
I wish to start a pension for my grandson and pay in £200 a month. What do I need to consider?
J. B., Oldham, Lancs.
Paul Thomas, of Money Mail, replies: You tell me your grandson is 22 so, if he is employed and earns more than £10,000, he should be enrolled in his company’s pension scheme.
From April 6, a minimum of 5 per cent of his salary, through a combination of his own contributions and his employer’s, will be paid into his pension.
While that is a great start, the more he can contribute at a young age, the better off he will be in retirement. This is because the contributions he makes when he is young will compound over time.
If you wish to contribute more, you can give your grandson the extra money and ask him to increase his contributions, or he can check if the scheme allows direct additional contributions from relatives.
But you should remember that his annual contributions cannot exceed £40,000 or his salary, whichever is lower.
However, if he is self-employed and does not have a pension, he should look to set up a self-invested personal pension.
Once he picks his investments, you can then contribute £200 a month as you plan to. The same contribution limits apply for so-called Sipp plans.
You could also benefit from contributing to your grandson’s pension, says Sarah Coles, of adviser Hargreaves Lansdown.
She says: ‘If you can afford to make these contributions from your income, without affecting your normal standard of living, and if you have proof these form a pattern of gifts, they count as being out of your estate immediately for inheritance tax purposes.
‘It means however long you live, they won’t be counted as part of your estate when it is assessed for inheritance tax.’
- Send questions to: Investment Clinic, Money Mail, Northcliffe House, London W8 5TT.