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Published 24/12/2018

Imagine if you could gift someone time? It certainly would be the perfect present!

It’s a key question for many of our older clients who realise that the best way of helping the younger generations is by putting money into their pensions. However, time, not money, is the greatest gift you can give.

Let me give you an example, which a client is happy for us to share. He’d forgotten about his “little policy with the Pru”. He told us: “It’s probably worth nothing”. How wrong that turned out to be.

In fact, despite an average monthly payment of £35 for 35 years, his pension pot had grown to just over £90,000. Understandably he was shocked by this revelation and even more so when we explained how he could have made his money work even smarter if he had increased his contributions with inflation. To give you an idea, based on recent rates of inflation, over 35 years he would have generated a fund worth more than £120,000.

To take this a step further, if the client had paid £60 a month over the same period, and increased the contribution with inflation, his pot would have been worth £210,000. This would have created a tax-free lump sum of £55,000 and an income of perhaps £6,500 per annum, plus state pension. All for a net total contribution of less than £35,000, assuming tax relief at 20%. N.B. these figures are for example only, however, you get the picture.

Time is the all-important factor. The client is happy for us to show you a redacted statement – it is astonishing! Under recent rule changes, in the event of his death, he would also be able to leave the residual pot to his beneficiaries tax-free and outside his estate.

The point is, you don’t need to put vast sums into a pension for your 20 somethings, you just need to do so when they are young, leaving them to concentrate on the daunting prospect of clearing their student debt, paying for the roof over their heads and childcare costs. Contributions attract 20% tax relief and can be made for all children, regardless of income, from birth.

Paul Thomas