The impact of lockdown on personal finances has been most felt by younger generations who may have lost jobs and businesses . Older family members, whose income has been unaffected, may want to help. Here are some pointers:
- Means Test
The unemployed and those on low incomes can apply for Universal Credit. This provides up to £344 per month for singles under 25 and £411.51 for over 25s. Couples may get up to £490.60 while under 25 and £596.58 if over 25. Additional payments for children and rent are available. However, this is a means tested benefit and if household savings exceed £6,000 the benefit is reduced by £4.35 for every £250 of savings.
Giving a lump sum, taking their available savings above £6,000 could mean that they lose eligibility for benefits.
- Pension Savings
Money saved in a pension plan, for someone under State pension age of 66, does not count towards the means test. Third parties can fund the pension plan of anyone aged 0 to 75, with tax relief added for non and basic rate taxpayers. Additional relief is available if the recipient is a 40% or 45% taxpayer (21%, 41% and 46% in Scotland).
Keeping retirement savings going while someone looks for another job helps their retirement plans stay on track. Big gaps in funding in the early years can make a real difference to when they can afford to retire.
Everyone can have up to £2,880 per year saved in a pension, even if they have no earned income. If paid into a pension plan which gives relief at source, the savings are automatically topped up by HMRC with a 25% bonus of up to £720 per year.
Where there is earned income, or self -employed profits, in the tax year, up to 100% of income or profits, capped at £40,000 a year can be saved. Any unused pension savings allowance from up to 3 earlier years can also be claimed.
- House Purchase
Those saving for a first home deposit may get a 25% boost to their savings from the Government. Up to £4,000 a year can be saved in a Lifetime ISA (LISA) from age 18 -50 (accounts must be opened before age 40) with 25%, up to £1,000 a year, added by HMRC.
The tax efficient account must be used for a deposit on a first home, or as retirement income after age 60. Withdrawals can be made for other reasons but result in a 25% penalty on the withdrawal, clawing back the Government subsidy and 6.25% of the saver’s own money.
Unlike pension savings, savings in a LISA count towards the means test for Universal Credit and other benefits. Providing funds for a LISA can be beneficial, but only once the saver expects to remain in stable employment and has other short -term savings they can access in an emergency.
- Help to Save
Having claimed Universal Credit or Working Tax Credit, once earned income resumes over £617.73 per month, a person is eligible to join the Help to Save scheme. This enables regular savings of up to £50 per month to be topped up with a 50p bonus for every £1 saved. The tax -free bonus of up to £1,200 is added to the individual’s savings over a 4-year period with access to the savings allowed. Providing regular financial support may enable those whose savings have been ravaged during a period out of work to rebuild them with the help of this subsidy.
- Student Debt
Parents, who themselves had a free education, often worry about their children’s student debt but paying this off early may not to be beneficial for all graduates. Student debt does not work like other loans but is really a graduate tax.
Those with earnings below £27,295 with a post 2012 loan, pay nothing back and only pay 9% of their earnings above this, regardless of the amount borrowed. Their earnings also determine the interest rate paid, which is lower when earnings are low.
Graduates with a pre-2012 loan start paying 9% of income over £19,895 pa. The interest rate, linked to Bank base rate, at 1.1% currently, is a very low cost.
The Institute for Fiscal Studies estimate that 73% of graduates will not pay back the whole of their loan, as any balance is written off after 30 years. This makes repaying student debt early a less effective way of supporting children or grandchildren, repaying other debts should be prioritised ahead of this.
1 ONS UK Labour Market, March 2021
2 Payback Time? Student debt and loan repayments April 2014
All statements concerning HMRC allowances are based on our understanding of current HMRC tax rates applying to tax year 2021/2022.
The Financial Conduct Authority does not regulate taxation advice.
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