3 little-known benefits of paying into someone else’s pension on their behalf 

As your retirement draws closer, you may come to realise just how important your pension could be for providing you with a stable life later on.

You might also start paying more attention to the tax efficiency of your pensions – including maximising the amount of tax relief you receive on your contributions, and thinking about your Income Tax liability for when you begin to take your benefits.

If you are married or in a civil partnership, you may be putting your retirement plans together as a couple. Or thinking about your own retirement could lead you to discuss the importance of early pension contributions with your adult children.

In any case, it could help to be aware that in addition to making your own pension contributions, you can also pay into another person’s defined contribution (DC) pension, and they can pay into yours too.

And yet, an FTAdviser report shows that 75% of people are unaware that you can pay into another person’s pension pot along with your own.

Keep reading to learn more about how paying into someone else’s pension works, plus three little-known benefits of doing so.

You can pay into someone else’s defined contribution pension on their behalf

A DC pension scheme could be a workplace pension or a personal pot such as a self-invested personal pension (SIPP). This is an invested asset that could form a large portion of your income in retirement.

Here are the basics of how paying into someone else’s pension works.

If the recipient (such as your spouse) does not have an income, you can pay up to £2,880 into their pension in each tax year (topped up to £3,600 by basic-rate government tax relief).

If you both earn an income, you can contribute up to the Annual Allowance amount into their pot as well as your own.

As of the 2023/24 tax year, and set to remain the case in 2024/25, the Annual Allowance is the maximum amount you can contribute to your pension in a single tax year without facing an additional tax charge. It stands at £60,000 or your total earnings, whichever is lower.

Your Annual Allowance may be lower than £60,000 if your income exceeds certain thresholds, or you have already flexibly accessed your pension.

Being able to pay into someone else’s pension could be helpful if:

• The recipient has taken time off work to have children
• They are unable to work for some time due to an illness or injury
• They’re too young to qualify for automatic enrolment (the law states that an employee must be automatically enrolled in a workplace pension scheme at age 22 if they earn £10,000 a year or more)
• You have already maximised your own Annual Allowance and wish to help your spouse or adult child boost their pension pot.

Let’s take a closer look at three key benefits of paying into someone else’s pension on their behalf.

1. Increased tax efficiency

Being able to pay into someone else’s pension is extremely tax-efficient.

Not only could they receive tax relief on the contributions you make, but you may also benefit from offloading additional wealth into a pension, even if you have already maximised the Annual Allowance within your own pot.

2. Boosting the potential for compound returns

Of course, the more you contribute into a pension, the greater the opportunity for compound returns.

For instance, if your adult child has a workplace pension that they pay into every month, your additional contributions could give their pot even further opportunities for growth over the long term.

Or, if you and your spouse are set to retire in the next 20 years, paying as much as you can into both pension pots now could mean you both have ample funds to draw from in retirement.

Of course, investing within a pension also puts the contributor’s capital at risk, so make sure you discuss this move with an independent financial planner first.

3. Mitigating Inheritance Tax

DC pension pots, including workplace pensions and SIPPs, do not usually form part of a person’s estate for Inheritance Tax (IHT) purposes.

So, if you were to pass away with plenty of wealth left in your pension, your children or grandchildren may be able to inherit this sum tax-free. Making the most of your pension by contributing to your spouse’s pot as well as your own may allow you to mitigate your family’s IHT liability in the future.

Get in touch

The rules around pensions, tax, and inheritance are complicated – so if you plan to make contributions into another person’s DC pension, it may be worth chatting with a professional first.

We’re here to help you grow your wealth sustainably and in line with your life goals. Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

Workplace pensions are regulated by The Pension Regulator.

The Financial Conduct Authority does not regulate estate planning.