Dramatically reduce tax bills in retirement by paying your partner’s pension

Couples who take a joint approach to pension savings can increase their retirement income by the thousands.

There is a huge disparity in the amount that men and women typically save for retirement.

Women aged 50 have saved a third less than men in their pensions, according to official data.

This is mainly due to the fact that, on average, women are paid less than men, as they tend to fall behind on their savings in the years they take off work to care for children or the elderly in the family. family.

But a spouse can contribute to their partner’s pension while they’re not working to make sure they don’t lose out financially in the future.

On top of that, building pension savings in both spouses’ names, rather than allowing one spouse to accumulate a much larger pension, can have big tax advantages.

So when should you pay your partner’s alimony? What if you ever pay for theirs over yours?

Anyone can contribute to their partner’s private pension, but the amount cannot be more than the beneficiary’s annual salary. This can be a helpful way to ensure that you both have your own cash in retirement, even if one of you has been absent from work.

Accumulating two pensions can mean that each of you is responsible for your own spending habits and has more flexibility over your finances in retirement.

Sarah Birch’s husband, Ian, has been paying her pension for the past 20 years. He started by contributing £110 a month and now pays £160.

Ian, a 65-year-old police officer, did this because Sarah, 62, was a stay-at-home mother to her seven children and had not accumulated her own pension savings.

Ian contributes to a defined benefit plan through work and plans to retire next year. Sarah’s private pension fund has a current value of nearly £80,000. “It was Ian’s suggestion, and I’m happier knowing I have my own pension savings,” she says.

Paying a partner’s pension can also reduce your overall tax bill. This is because you can claim tax relief on any money you pay into a pension, whether it’s yours or someone else’s.

Tax relief is paid at the income tax rate of the person receiving the money, not the rate of the person making the payment.

This makes it an attractive option when one of the partners has a higher income, since paying their pension allows the one with the lower tax rate to potentially benefit from additional tax relief.

Every year you can save up to £60,000 in your own pension while taking advantage of tax relief. On top of that, she can pay up to £60,000 or the equivalent of her partner’s annual salary in her pension, whichever is less.

A helping hand: You can pay your partner’s alimony while you’re not working to make sure you don’t lose out financially in the future.

If your partner isn’t working, you can still pay up to £2,880 a year, which would rise to £3,600 after tax relief.

The pension provider will claim this tax relief on behalf of the person receiving the money and automatically add it to their pension fund.

However, this does not apply to the higher rate relief that must be claimed from HMRC.

Any income you get from your pension after age 55 is subject to income tax. The first 25 percent is tax free.

He then gets the tax-free personal allowance each year, currently £12,570. After that, she pays 20 per cent, 40 per cent or 45 per cent tax, depending on her overall income in retirement (rates are different in Scotland).

By splitting your income streams evenly, you could make the most of your personal allowance and pay a lower tax rate.

For example, if your goal is a family income of £55,000 a year in retirement, it is more tax efficient for two people to draw from separate pensions to achieve this, because you will start paying 40% tax once your income exceeds £50,270. .

Splitting the income would keep both as basic rate taxpayers, meaning around £5,000 would not be taxed at 40 per cent on one income.

Savings: Retired factory worker Gary Tuttle, 58, paid his wife Elizabeth’s pension for six years before retiring in 2022 at age 58.

Retired factory worker Gary Tuttle, 58, paid his wife’s pension for six years before she retired in 2022 at age 58.

Gary realized that if he continued to contribute to his private pension, he would be paying 40 per cent tax on some of the income he earns in retirement, while his wife Elizabeth would not be using her full personal allowance of £12,570.

So he paid around £15,000 a year into Elizabeth’s pension, the equivalent of her annual salary.

This brought the value of his total pension to £150,000. He now withdraws £12,570 a year (plus an additional £4,167 tax-free; he can withdraw the first 25 per cent of his pension tax-free).

This will continue until you receive your state pension at age 67, when you will reduce the amount you take from your personal pension to keep your tax bill down.

Bianca Capstick, 38, is now considering whether to pay her partner’s alimony. Her partner, Matt, 32, works in nuclear power and her employer has a generous pension plan that she has contributed to for 11 years.

As an independent public relations consultant, Bianca receives no employer contributions, so she pays her own personal pension.

Bianca is a basic rate taxpayer; Matt is a higher rate filer. They could claim more tax relief through the self-assessment if she paid a personal pension on his behalf than if she paid her own pension.

Allowance: each year you can save up to £60,000 in a pension while benefiting from tax relief

His dilemma is that Matt’s pension is on track to exceed a million pounds when he retires.

Until this April, the amount you can save in your pension tax-free throughout your life was capped at £1,073,100. Above this level, he faced tax charges of up to 55 percent when he withdrew from his pension in retirement.

The lifetime allowance was removed earlier this year, but the Labor Party has threatened to reinstate it if it wins the next election.

In the event the limit is reset, Matt and Bianca could be affected if they accumulate their savings only in Matt’s pension fund.

Bianca says: ‘Managing our pension contributions is something we’ve been talking about.

We earn and save money in different ways, so we are looking into how we can maximize our situation and be on a level playing field.”

Iain McLeod, of wealth manager St James’s Place, says there are risks associated with contributing to your partner’s pension if you’re not married.

He says: ‘In the event of a breakup, contributions from Bianca or Matt would not be protected.

“As an unmarried couple, any contribution either makes to the other’s pension would be considered a ‘gift’ and could be subject to inheritance tax.”

Unmarried couples are not automatically entitled to 50 percent of the assets if they separate.

moneymail@dailymail.co.uk