Can we set up a pension for our son with a severe illness?

Our adult son was stricken with a brain abscess, and while in the hospital he also had a seizure and contracted Covid.

He has to learn to read and write again, and his thinking process needs time to return to how it used to be.

My wife and I are both in our seventies and would like to ensure that when he retires in about 25 years he will have a monthly private pension for life. At this stage we are not sure if he will work again – only time will tell.

Which companies are there that could provide him with this service, if we were to put a lump sum into a scheme for him now?

Any help or advice would be gratefully received. As parents, we want to make sure he’s set up properly when we’re gone. ZR, by email

Helen Crane from This is Money replies: I am very sorry to hear about your son’s health.

This must be an extremely difficult time for you and your family, but I am glad to hear that you and your wife are taking care of your son and making plans for his future.

With his recovery timeline and ability to return to work uncertain, it certainly sounds like a good idea to build a nest egg on his behalf.

But how do you do that best? I asked three financial planners for advice.

What are the first steps?

Before deciding where to put your money, the financial planners said there were several important things to look at.

You may have already done some of this, but I’ll include it here for the benefit of others who may find themselves in a similar situation.

Doug Brodie, CEO of retirement planning firm Chancery Lane, said: First they have to find out what their son’s entitlement to benefits will be.

They will probably find that a reasonable income is available to him – so they need to check that whatever they are arranging in terms of retirement doesn’t ruin that.

The parents could investigate this themselves if they feel confident, or go to a service such as the Burgeradviesbureau.

In general, those who have assets must spend those assets before they get any benefits. What the parents can discover is that if they set up money for him in his name, he suddenly no longer receives benefits.

Andy Page, chartered financial planner at Old Mill, added: The first thing to mention is that any decision should be made after a thorough examination of both the parents and their son’s financial situation and overall objectives.

We should consider the affordability of a payment for the parents, along with any other financial goals they may have – such as their own retirement plans, allocating money for grandchildren, and possible future health care costs.

It is also important to be considerate of any other children and discuss any payments or gifts to the son openly within the family to avoid any resentment in the future.

Can parents pay pension contributions for their son?

When it comes to how to pay for a pension for your son, there are two options: pay a pension over time or do it all at once.

If you choose the first route, this means that you periodically contribute to your son’s existing pension, if the scheme allows this. If not, he can set up a new one. Given enough time, this could add up to a potentially significant amount.

However, the amount that someone can contribute to someone else’s pension is subject to maximums, which can be quite restrictive in your case.

Lawrence Brady, partner at Saltus, explains: A person can only get tax relief for contributions up to 100 per cent of their income, or £3,600. Most pension providers do not accept premiums that are not tax deductible.

In this case, if the son does not earn, the contributions that the parents can pay are capped € 3,600 gross per year.

Andy Page adds: It It is possible for the parents to pay pension contributions for their son. If he already has a pension, a ‘third-party contribution’ may be paid to it, depending on the scheme’s own rules.

If he does not have a pension, he would have to arrange one himself – the parents are generally not able to do this. Here we would have to check whether the son is capable of making such a decision given his condition.

If he was already a participant in a pension in previous years, it may be possible to transfer unused supplements, so that a larger fixed contribution can be paid.

The flip side of the pension contribution is that the money is locked up until the minimum retirement age, which will soon rise to 57, with no access.

In addition, parental contributions to inheritance tax might be treated as gifts unless they fall under one of the usual exemptions. These include gifts under £3,000 a year or gifts outside of normal expenditure.

What about paying in one go?

If you think that the limit of £3,600 a year will not allow you to build up enough pension, there are ways to increase your income by paying in a lump sum.

The main way to do this is by purchasing a retirement annuity. This would provide him with a guaranteed income for the rest of his life, however long he lived.

However, the problem here may be a timing one, as an annuity cannot be purchased until the recipient is 55 years old. This limit will be increased to 57 years in 2028.

You don’t say how old your son is, but since he’s due to retire in about 25 years, I’m assuming he’s in his early 40s – so you’d have to wait a little longer.

Another possibility is that if you or your wife have a benefit or money purchase pension, you can pass on the remainder of your own pension to your son when you die.

Lawrence Brady says: A retirement annuity can be purchased from the age of 57. At that point, an increased annuity may be available, depending on their son’s health.

To give an example, a purchase price of £1 million at the current date (assuming an age of 55) would generate a guaranteed income of £41,152 with an annual increase of 2.5 per cent.

David Brodie says: Another possibility is that his own pension is passed on to his son.

If he has a money purchase pension, he or his wife, he should say in his wish letter that he wants this to happen.

What are the non-retirement options?

If none of the above retirement options appeal to you, you may want to consider taking care of your son’s future in some other way.

The advisors I spoke to outlined several other methods for doing this.

Purchased annuity

Not all annuities are for retirement. Another option is to purchase an annuity, which allows you to invest a fixed amount in exchange for a guaranteed income.

These are also available at a younger age than a retirement annuity.

Brady says: Through a purchased annuity they can immediately buy an income for life. Canada Life, for example, offers an annuity from the age of 35.

A purchased annuity allows you to invest a lump sum of cash in exchange for a regular, guaranteed, tax-efficient income.

Part of the income is taxed and part untaxed because it is treated as a ‘return of capital’.

A donation in cash or into a trust

Page says: Another option to consider is an outright gift, which would not provide any tax relief, but would provide more flexibility in terms of access.

The son could then spend the money as needed instead of waiting for retirement. This can be important depending on his needs.

Alternatively, a donation to a trust would allow for some parental control if they were concerned about how their son would use any gifted funds. Again, careful planning is needed and specialist legal and financial advice is essential.

Brady adds: Their son may qualify for a disabled trust. This could give the parents as trustees the freedom to decide how to use the trust assets, and they could also designate other younger family members as trustees.

If the trust qualifies as an invalid trust, the trustees can elect so that the tax is due to the beneficiary, and not at trust rates.

A lump sum can be invested in an offshore bond written into trust. Income and profits within the bond are rolled up gross, without the need for an annual tax certificate.

The bond can then be used to provide flexible income in the future. All income above the cumulative 5 percent deferred tax deduction is subject to income tax rates.

Invest it in a with-profits fund

Brody says: In a case like this, I think investing a lump sum in a with-profits fund is the simplest way to provide for their son.

However, they should read through and understand what they are doing or seek advice.

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 expect to pay as a growth rate.

The expected growth rate is currently 7.7 percent on the PruFund Growth Fund and 7 percent on the cautious fund.

In my experience, Prudential is also aware of the needs of those less able.