Our adult son was struck down with a brain abscess, and while in hospital also had a seizure and caught Covid.
He has had to start learning to read and write again, and his thought process is taking time to come back to the way it used to be.
My wife and I are both in our seventies and would like to make sure that he is provided for with a private monthly pension for life when he retires in approximately 25 years’ time. At this stage we are not sure if he will work again – only time will tell.
What companies are out there who could provide this service for him, if we were to put a lump sum of money into a scheme for him now?
Any help or advice would be gratefully received. As parents, we want to make sure he is well set up when we have gone. Z.R, via email
‘We want to provide’: These parents are looking to give their son long-term financial security, following his recent health problems
Helen Crane of This is Money replies: I was very sorry to hear about your son’s health.
This must be an extremely hard time for you and your family, but I am glad to hear that you and your wife are looking out for your son and planning for his future.
With his recovery timeline and ability to return to work uncertain, building up a nest egg on his behalf certainly sounds like a good idea.
But what is the best way for you to do that? I asked three financial planners for their advice.
What are the first steps?
Before deciding where to put your money, the financial planners said there were several important things to look into.
You may have done some of this already, but I will include it here for the benefit of others who may be in a similar situation.
Doug Brodie, chief executive at retirement planning firm Chancery Lane, said: Firstly, they need to work out what their son’s benefits entitlement will be.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
They will probably find that a reasonable income is available to him – so they need to check that whatever they set up in terms of a pension does not mess that up.
The parents could research this themselves if they are confident in doing so, or go to a service like the Citizens Advice Bureau.
In general, those who have assets need to spend down those assets before they get any benefits. What the parents may discover is that, if they set up money for him that is in his name, all of a sudden he doesn’t get benefits any more.
Andy Page, chartered financial planner at Old Mill, added: The first thing to mention is that any decision should be made after a thorough investigation of both the parents and their son’s financial situation and overall objectives.
We would need to consider the affordability of any payment for the parents, in conjunction with any other financial objectives they may have – such as their own retirement plans, allocating money for grandchildren and possible future care costs.
It is also important to consider any other children, and discuss any payments or gifts to the son openly within the family to avoid any potential resentment in the future.
Can parents make pension contributions for their son?
When it comes to how you could pay into a pension for your son, there are two options: paying into a pension over time, or doing it all in one go.
If you choose the first route, this would mean making regular contributions into your son’s existing pension, if the scheme allows this. If not, he could set up a new one. Given enough time, this could accrue into a potentially significant sum.
However, the amount someone can pay in to another person’s pension is subject to caps, which in your case could be quite restrictive.
Lawrence Brady, partner at Saltus, explains: A person can only receive tax relief on contributions up to 100 per cent of their income, or £3,600. Most pension providers will not accept contributions which are not tax relievable.
If the son in this case is not earning, the contributions the parents can make will be capped at £3,600 gross per year.
Drip-feeding: Making regular contributions to their son’s pension could result in a significant sum – but only across several years
Andy Page adds: It is possible for the parents to make pension contributions for their son. If he has a pension in place already, it may be possible for a ‘third party’ contribution to be paid to that, depending on the scheme’s own rules.
If he doesn’t have a pension, then he would need to set one up himself – this generally cannot be done by the parents. Here we would need to check that the son has the capacity to make such a decision, given his condition.
If he was already a member of a pension in previous years, then it may be possible to carry forward any unused allowances which would allow for a larger lump sum contribution to be made.
The downsides for pension contribution are that the money is locked away until the minimum retirement age, soon to rise to 57, with no access allowed.
In addition, contributions from the parents would potentially be treated as gifts for inheritance tax purposes, unless they fall under one of the usual exemptions. These include gifts under £3,000 per annum or gifts out of normal expenditure.
What about paying in a lump sum?
If you don’t think the £3,600 per year limit will allow you to build a large enough pension pot, there are ways to provide a higher income by paying in a lump sum.
The main way to do this is to purchase a pension annuity. This would pay him a guaranteed income for the rest of his life, no matter how long he lived.
The issue here may be one of timing, however, as an annuity can only be bought once the recipient has reached 55. This limit will be raised to 57 in 2028.
You don’t say how old your son is exactly, but given he would retire in around 25 years I will assume that he is in his early forties – so you would have to wait some time.
Another option is that if you or your wife have a defined benefit or money purchase pension, you could pass on the remainder of your own pension to your son when you die.
Lawrence Brady says: A pension annuity can be purchased from age 57. At this point an enhanced annuity could be available, depending on their son’s health.
To give an example, a purchase price of £1million at today’s date (assuming age 55) would provide a guaranteed income of £41,152 with a 2.5 per cent annual escalation.
David Brodie says: Another option is that his own pension could be passed on to his son.
If he has a money purchase pension, either him or his wife, he needs to say in his letter of wishes that he wants that to happen.
Nest egg: There are several ways to provide an income for an adult child, from pensions to a trust or investing the money long-term
What are the non-pension options?
If none of the pension options above appeal to you, you may want to consider providing for your son’s future in a different way.
The advisers I spoke to outlined several other methods of doing this.
Purchased life annuity
Not all annuities are for retirement. Another option is a purchased life annuity, which lets you invest a fixed sum in exchange for a guaranteed income.
These are also available at a younger age than a pension annuity.
Brady says: They can purchase an income for life immediately via a purchased life annuity. Canada Life, for example, will offer a purchased life annuity from age 35.
A purchased life annuity lets you invest a cash lump sum in return for a regular, guaranteed, tax-efficient income.
Part of the income will be taxed, and part untaxed as it’s treated as a ‘return of capital’.
A gift in cash or in a trust
Page says: Another option to consider might be an outright gift, which wouldn’t attract tax relief but would allow more flexibility in terms of access.
The son could then spend the money as needed rather than wait for retirement. This may be important depending on his needs.
Alternatively, a gift to a trust would allow some control by the parents if they are worried about how their son may use any gifted funds. Again, careful planning is needed, and specialist legal and financial advice would be essential.
Brady adds: Their son may qualify for a disabled trust. This could provide the parents as trustees with discretion to decide how the trust assets should be used, and they could also appoint other younger family members as trustees.
If the trust qualifies as a disabled trust, the trustees can make an election so that the tax is due on the beneficiary, and not at trust rates.
A lump sum investment could be made into an offshore bond written in trust. Income and gains within the bond will roll up gross, without the need for an annual tax certificate.
The bond can then be used to provide flexible income in the future. Any income over the cumulative 5 per cent tax deferred allowance will be subject to income tax rates.
Invest it in a with-profits fund
Brodie says: In a case like this, I think investing a lump sum in a with-profits fund is the most simple method of being able to provide for their son.
They need to read through and understand what they’re doing or take advice, however.
The Prudential PruFund is a good example, as it essentially protects the underlying capital. At the beginning of the year they tell you what they are expecting to pay as the growth rate.
On the PruFund Growth Fund the expected growth rate is currently 7.7 per cent, and on the cautious fund it is 7 per cent.
In my experience Prudential is also aware of the needs of those who are less able.
