Pension savings could boost child benefits, mutual insurer finds

Thousands of higher-earning families could boost their child benefit entitlements by saving more money into their pension, according to a mutual insurer.

Royal London calculates that working families are collectively losing up to £171 million per year by failing to make the most of a "little known" connection between their child benefit entitlements and their pension contributions.

Since 2013, working families where one parent earns more than £50,000 per year face a high income child benefit charge, which can wipe out some or all of the value of their child benefit on a sliding scale.

At the point where a parent earns over £60,000, the tax charge is equal to the amount they receive in child benefit.

But Royal London believes many people may not realise that earnings measured for these purposes are based on income net of pension contributions.

This means that people who ramp up their pension contributions could potentially lower their income for purposes of the high income child benefit charge - and face a smaller charge as a result.

Royal London said families in this position can get particularly good value from making additional pension contributions, given that people in this earnings bracket are nearly all higher rate taxpayers and effectively get a 40p in the pound contribution to their pension contributions through pension tax relief.

Based on previous estimates in 2013 from the Institute for Fiscal Studies (IFS), Royal London said around 320,000 families could fall within the £50,000 to £60,000 earnings band.

It said if each each of these people were to contribute an additional £3,000 per year into their pension, they could cut their child benefit charge by 30% of the amount of child benefit received.

For a family with two children this would be a gain of around £536 per year - and across all families in this income bracket this could potentially mean a saving on child benefit charges of £171 million per year.

Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: "For a higher earning family, putting money into a pension is already a very attractive option.

"They benefit from higher rate tax relief on their contributions and may also get a matching contribution from their employer.

"But what they may not be aware of is the additional advantage of reducing the tax charge they face as a higher income family receiving child benefit.

"This is another reason for families in this income bracket to prioritise pension saving and to take advice about their options."

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How we spend our pensions

Figures from Saga show that the over 50s now account for the majority of money spent by Brits on travel and tourism. They have the time to spare, the money, and they are healthy enough to take on the world.

A poll from Abta found that in the wake of pension freedoms, 35% of people were considering cashing in at least part of their pension to travel. A separate study by Senior Railcard found that pensioners take an average of three holidays a year, plus two weekends away, and 17 day trips.

Research from Senior Railcard found that retirees eat out an average of three times a month. However, one in ten do so more than twice a week, and one in three people said that one of the first things they did when they retired was to go out for lunch with their friends.

Of course, just because retirees want to enjoy themselves, it doesn't mean they are happy to throw money away. The vast majority are keen to eat at lunchtimes, when a fixed lunch menu tends to be cheaper, and canny retirees are skilled at tracking down pensioner special offers too.

Figures from the Office for National Statistics show that on average nearly a fifth of the money spent by people aged 65-74 is on leisure. This includes everything from the cinema and theatre to golfing and gardening. They spent more on this than on food, energy bills and transport.

A report by Canada Life found that retirees are spending £4,279 a year on having fun - that’s more than £1,000 more than they spend on boring essentials, and is a 74% increase over the past ten years. It went on to predict that this trend was set to continue, and that pension freedoms would encourage people to spoil themselves a bit more in retirement

Pensioner property wealth is now over £850 billion, and all these family homes don’t look after themselves. The Senior Railcard survey put home renovations in the top 20 activities people got stuck into on retirement, and figures from ABTA found that almost a third of people who were considering raiding their pension pots under the new pension freedoms planned to spend the cash on their home. This seems like an eminently sensible investment - looking after what is undoubtedly their most valuable asset.

Unsurprisingly, while some pensioners are very well off indeed, others are struggling with debt. Figures from Key Retirement found that the average retiree has £34,000 of debt.

Most of this is mortgage borrowing - in many cases driven up by the number of people who unwittingly signed up to an interest-only mortgage. However, credit cards, overdrafts, and loans are also common. It’s why so many pensioners have used pension freedoms to access enough cash to pay their debts.

The day to day basics are swallowing up their fair share of pensioner cash too. On average, people aged 65-74 spend a third of their weekly income on essentials like food and bills - which is hardly living the high life.
The bank of gran and grandad has become an increasingly vital source of cash for families. According to Key Retirement, of those who release equity from their property, 21% of them use the cash to treat their children and grandchildren. This includes an average of £33,350 to help children get onto the property ladder, £6,000 to buy them a new car, £11,000 on family weddings, and £24,780 giving grandchildren a helping hand.

While retirees are quite rightly spending what they need to enjoy retirement, they are hardly all throwing caution to the wind, buying flash cars and spending the kids' inheritance.

Most expect to have something left over to pass onto their family after their death. Some 69% expect to leave property in their wills, and 75% expect to leave cash - according to Unbiased.co.uk - because while baby boomers know how to have fun - they also know how to save for the future.

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