How can I gift my pension to my sons to help them buy their first homes?

In our weekly series, readers can email in with any questions about retirement and pension savings to be answered by our expert, Rachel Vahey, head of public policy at investment platform AJ Bell. There is nothing she does not know about pensions. If you have a question for her, email us at [email protected].

Question: I want to gift some of my pension to my twin sons to help them both buy a property. Should I put it into their Lifetime ISA or is there a better way? What tax will I pay on using money from my pension?

Answer: Answer: It is completely understandable to want to help your children get on the property ladder. With house prices still stretching many first-time buyers, lots of parents are looking for ways to give their children a financial boost. If you have built up a sizeable pension, you may be wondering whether taking money from it and gifting it to your sons is a sensible way to help.

The short answer is that you can use pension money in this way, but you should tread carefully. Pensions are designed first and foremost to support you in later life. Before giving money away, make sure you are confident you will still have enough to fund the retirement you want, including any care costs or unexpected expenses. A regulated financial adviser can help you work through what you can afford to give without putting your own future security at risk.

The upcoming inheritance tax changes have made this question more pressing for some families. From 6 April 2027, most unused pension funds and pension death benefits will be included in a person’s estate for inheritance tax purposes. That means some people who are old enough to access their pension (currently age 55, but increasing to 57 from 6 April 2028) are considering whether to draw surplus money from their pension during their lifetime and pass it on instead.

If you do decide to take money from your pension, the tax treatment depends on how you access it. Usually, up to 25 per cent of the amount you take can be paid tax-free. The rest is taxed as income in the tax year you receive it, so a large withdrawal could push you into a higher tax band.

You do not have to take everything at once. You may be able to take a lump sum, move money into drawdown and take it gradually, or use some of the pension to buy an annuity, which pays a guaranteed income for life. You can “mix and match” these options; taking part of the money you access and part as an annuity.

Once the money is in your bank account, you can gift it to your sons. Keep a clear record of what you give and when, as gifts can still matter for inheritance tax. Broadly, larger gifts may fall outside your estate if you survive for seven years, but the rules can be complicated, particularly if you continue to benefit from the money in some way.

For your sons, a Lifetime ISA (LISA) could be an attractive option if they are eligible and definitely plan to buy a first home. They can each pay in up to £4,000 a year and receive a 25 per cent government bonus, worth up to £1,000 a year. The money can be used towards a first home costing up to £450,000, provided the account has been open for at least 12 months.

The downside is flexibility. If they withdraw LISA money for anything other than buying a first home, or after age 60, a 25 per cent withdrawal charge normally applies. This does more than simply remove the government bonus; it can leave them with less than they put in. So it is best suited to money they are confident they will use for a qualifying property purchase.

A standard cash ISA, stocks and shares ISA or ordinary savings account would be more flexible, but would miss out on the LISA bonus. That bonus can be valuable, especially if both sons can use it, but it should not be the only factor. Their timescale, attitude to investment risk and certainty about buying a first home all matter.

There is also some uncertainty around the future of LISAs. The government has said it will introduce a new first-time buyer (FTB) ISA at some point in the future.

People will still be able to open a LISA until the new product becomes available, and once it is, existing LISA holders should be able to continue saving into their accounts. The government proposes not to allow transfers from a LISA to the new FTB ISA.

However, the details of the new FTB ISA, including how much you can pay in, what the bonus will be, and what property price cap will apply, are still developing.

The Government also plans to ban transfers for those under 65 from an investment LISA to a Cash LISA or a “normal” Cash ISA from April 2027 (although transfers the other way around from cash to investment types will be allowed).

One last thing to note. The property price cap decided for the FTB ISA will also apply to LISAs, so at some point, the £450,000 cap may change. At this point, it is too soon to say whether it will stay the same, increase, or even possibly fall.