If you’re in a position where you can gift money to your children in order for them to invest in their future, how should you go about it?
Well 2 options that are frequently bought up are paying money into a child’s pension or paying into the still fairly new kid on the block, the lifetime ISA (LISA).
In this article we will compare the two and I’ll give you my thoughts on which one is best to use.
LISA / Pension compared
*If a child is working then significantly more could be paid into a pension, potentially up to 100% of their earnings but there are far more rules to consider.
LISA / Pension – which is best?
Let’s look at key differences.
You can contribute more to a LISA than a pension whilst the child is not working.
The upfront ‘bonus’ is basically the same on each product but the LISA has better tax on exit as there is none! Unlike a pension where the child will likely pay tax when making withdrawals.
A LISA is slightly less flexible when it comes to retirement planning as the child will need to wait until they are age 60 to make withdrawals (pensions currently 55). Although LISA’s are less complex when it comes to making withdrawals as there is no tax to pay.
If you want to help your child onto the property ladder then a LISA definitely makes sense because they would be benefiting from some free money from the government.
Also better for longer term retirement planning initially whilst your child is not working, as the contribution levels are higher. One thing to watch out for though is that the LISA allowance of £4,000 forms part of the overall adult ISA allowance of £20,000. So be sure to check you don’t restrict your child’s full ISA allowance by contributing to a LISA.
As the child becomes a higher tax payer with better earnings. The pension makes more sense.
There are some other issues to consider.
It’s unclear how long LISA’s are likely to stick around.
In their first 12 months (2017/18 tax year) there were 166,000 subscriptions, £517m saved at an average £3,114 per account. This was below the government’s target of 200,000 account openings.
Providers in the industry however think the take up has been steady.
When it comes to providers there aren’t many offering a LISA.
Currently only 4 providers offer cash LISAs with the best rate about 1.4%. Remember current UK inflation is about 1.7% so you are still losing money in real terms.
There are also only a couple of investment LISAs from the likes of AJ Bell, Hargreaves Lansdown and Nutmeg.
Actually you need to be careful of the penalty on LISAs. You might think that the 25% penalty only takes back what was paid in bonuses. Well actually it’s more! If you contribute £4,000 which becomes £5,000 with the bonus. Then 25% on the early withdrawal of £5,000 is £1,250. More than the £1,000 bonus you received!
Finally when making any gifts to your children you need to consider your Inheritance Tax position. You can only make so many gifts to children, or anyone for that matter, each tax year and for them not to have to pay Inheritance Tax on your death.
If you would like a proper gifting plan designed for you that not only reduces your own tax position but also ensures money is placed in the right products so your children can achieve their own goals in life, then why not take advantage of our free 15 minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction. With the right planning you could leave a lasting family legacy rather than a bumper payday for the tax man.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.