Parents may be able to get £18,500 & boost pension pot by over £120,000 thanks to ‘quirk’

Child benefits: Which? explains payment and eligibility

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Parents who are earning between £50,000 and £60,000 a year as their individual income may be able to gain as much as £18,500 in Child Benefit payments, analysis from Quilter suggests. This could be done by increasing pension contributions, hence also leaving them £120,000 better off in retirement, the wealth management firm said.

Calculations show a family in which there are two young children with one parent earning £59,000, could be able to claim more than £18,500 over the 12 years the children are eligible for Child Benefit payments, if they increase their pension contributions.

The analysis found this could be achieved if they boost contributions to their pension by £467 per month.

Due to the additional tax relief on pension contributions for higher rate tax payers, and the extra Child Benefit payments, it would mean it would cost someone just over £35,000 in total over 12 years to gain just under £49,000 from these two tax benefits.

According to Quilter, the long-term result would be to increase their pension pot by more than £122,000 at age 65, assuming a modest growth of two percent after charges and inflation.

A family with one child can claim up to £1,094 a year in Child Benefit.

Families with two children can get nearly £1,800 a year.

However, if one earner in a family makes more than £50,000 a year, then they will be affected by the High Income Child Benefit tax Charge (HICBC).

This means they must pay back one percent of the Child Benefit they receive for every £100 over the threshold of £50,000.

However, the HICBC cap is on income after pension contributions.

It means if someone pays more into their pension, they could end up falling below or closer to the threshold.

This therefore increases the amount of Child Benefit they receive, as well as taking advantage of the tax relief on pension contributions.

The HICBC was introduced in January 2013, and it has significantly reduced the number of families getting Child Benefit, Quilter said.

Figures show, on August 31, 2019, there were approximately 7.28 million families claiming Child Benefit, down from 44,000 families from a year earlier.

London, the South East and the North West have the highest number of families in receipt of Child Benefit in the UK.

Ian Browne, pensions expert at Quilter commented: “The Child Benefit system is incredibly complicated and wage inflation has gradually pushed more people over the High Income Child Benefit threshold meaning fewer and fewer families are claiming Child Benefit each year.

“At the most recent budget, the higher rate tax threshold has been frozen at £50,270 but the High Income Child Benefit Threshold of £50,000 has not changed with it meaning basic rate taxpayers will get caught for the first time.

“However, parents often don’t realise that they can receive much more in Child Benefit payments by upping their pension contributions while also setting themselves up for a more prosperous retirement and taking advantage of the favourable tax relief available.

“Although this does mean that someone has to increase how much they are saving for retirement, the benefits mean that the ultimate gain far out strips the spend.

“There is still a significant proportion of people in the UK who are not saving enough for retirement and utilising this quirk in system could help them achieve their retirement aspirations.

“Everyone’s financial circumstances are different and seeking professional financial advice is always best to ensure that your whole financial life is accounted for.”

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