Contributing to someone else's retirement plan: Amounts and guidelines for contributions
Boosting Retirement Savings with Third-Party Contributions
Third-party contributions, or contributions made by someone other than the pension holder, can play a significant role in addressing the gender pension gap and ensuring a more comfortable retirement for all.
What are Third-Party Contributions?
Third-party contributions are pension contributions made by partners, parents, or other family members. These contributions can help bridge the gaps in pension savings that often occur due to career interruptions, such as those caused by caregiving responsibilities [1].
Reducing the Gender Pension Gap
Women disproportionately experience career interruptions, which can limit their pension savings and widen the gender pensions gap. By making contributions to someone else's pension, family members can help top up savings during times when the individual cannot contribute sufficiently [1][3].
A More Comfortable Retirement
By increasing pension savings, third-party contributions help individuals accumulate a larger pension pot, which translates into higher retirement income. For caregiving partners, this prevents pension gaps from growing and supports continued retirement saving even when one partner temporarily halts or reduces contributions [2].
Additional Benefits
- Family members can start pensions for younger individuals early, giving them a head start on retirement savings [1].
- Third-party contributions can "future-proof" pensions by maintaining contributions through life changes, preserving employer contributions in workplace schemes [2].
The Gender Pension Gap: Context and Causes
The gender pension gap arises mainly because women earn less and have more career breaks, impacting pension wealth accumulation. Recent trends show an increasing gap due to the shift from defined benefit to defined contribution pensions that disproportionately affect women [3][5]. Broader systemic issues include pay inequality and lack of support for caregiving roles, but third-party contributions offer a practical tool within families to mitigate some disparities [1][5].
Other Applications of Third-Party Contributions
- Normally, it's not possible to open a pension scheme for someone else, but with children's pensions, the legal guardian sets up the scheme, rather than the child [1].
- Parents and guardians can set up a pension for a child to give them a head-start for saving for their future [1].
- Gifting money into someone's pension could help reduce a potential inheritance tax liability [1].
Financial Planning and Third-Party Contributions
Third-party contributions can be a useful financial planning tool, particularly for those who have not managed to build up much retirement savings [2]. For example, if you make five payments of £3,600 (including tax relief) into someone's pension from age 35, this would provide them with an additional fund of approximately £61,000 at age 67 [1]. Taken as an annuity, this could look like an extra £4,000 for life in retirement [1]. An additional £61,000 at retirement (or £4,000 a year) would have cost the person contributing to the pension just £14,400 [1].
Awareness and Understanding of Third-Party Contributions
Younger people (aged 18-34) are more aware of this option compared to older people (aged 55 and over) [1]. Most (78%) additional rate taxpayers know about the partner's pension perk, compared to 61% of higher rate taxpayers and 29% of basic rate taxpayers [1]. However, a survey found that only 34% of people know they can pay into the pension of a partner [1].
Conclusion
Third-party contributions directly address gaps in women's pension savings caused by career interruptions, supporting a more equitable and financially comfortable retirement. This strategy leverages family or partner resources to boost savings when the individual cannot contribute fully themselves [1][2]. By understanding and utilising third-party contributions, individuals can make significant strides towards a more secure financial future.
[1] Source: Pension Awareness Day [2] Source: MoneySavingExpert [3] Source: The Pensions Regulator [4] Source: The Financial Times [5] Source: Women and Equalities Committee Report on Pensions for Women
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