Couples who take a joint approach to pension saving can end up far better off in retirement, though there are some snags – particularly regarding tax.
You should concentrate on maxing your own pension before trying to boost your partner’s, and there are circumstances where it makes financial sense to focus on the higher earner’s pension, say experts.
We round up tips on taking full advantage of pensions as a couple, to gain the benefit of all the perks available, for example if one partner is doing unpaid caring for children rather than in paid employment.
Pension saving: Couples who adopt a joint strategy can end up far better off in retirement
What to consider before boosting a partner’s pension
You can start off by ensuring you both get the most out of higher matched pension contributions from an employer.
This is free money – plus extra tax relief from the Government on top – you won’t receive in your pension otherwise. But take careful note of the caveats below on tax relief.
‘Don’t rely on one partner’s pension savings, even if only one partner is working,’ says Ray Black, managing director of chartered financial planning firm Money Minder.
‘Building savings for retirement in both partners’ names rather than just one provides for a more tax efficient joint income in retirement.
‘If one partner in the relationship is not working, for example a stay at home parent looking after younger children, it’s possible to pay up to £240 per month net in to a pension plan for the non-working partner and obtain £60 per month (a 25 per cent uplift on what is being saved in to the plan each month) via the generous tax relief that is added on top of your own contribution that is available right up until age 75.’
Alistair McQueen, head of savings and retirement at Aviva, says: ‘Paying into someone else’s pension is very possible, and can carry significant attractions.
‘It could boost the long-term financial wellbeing of the other and can be a powerful means of increasing your combined pension tax benefits.
‘However, contributing to another’s pension before your own financial wellbeing has been sorted could be counter-productive, if it means a shortfall in your own financial resilience later in life.
What are ‘net pay’ and ‘relief at source’?
Net pay means workers contribute directly into their pension before their tax bill is calculated, so their pension tax relief is already included and there is no need to claim it from HMRC.
Under relief at source the pension provider claims the income tax relief directly from HMRC and adds it to each worker’s pension.
‘And it needs to be recognised that the relationship that encourages contributions into another’s pension in the first place may not be the relationship that exists when it comes to accessing any pension savings.’
1. Check if you can pay into each other’s pension schemes
You can theoretically contribute towards each other’s work pensions up to the level of your annual salary or £3,600 per year if you are not working.
But you need to check with your pension scheme what the rules are and how flexible they are on this issue.
The options might be different if it is a ‘net pay’ or ‘relief at source’ scheme or if your employer makes payments directly into a private pension or self-invested personal pension (Sipp) for you.
McQueen notes that people with a pension that uses relief at source – all personal pensions and some master trusts, which manage centralised funds for several employers at once – can pay in or have paid in by a third party up to £3,600 gross (£2,880 net) and get tax relief regardless of how much they earn.
This means a partner of someone not working could pay £2,880 into a non-working partner’s relief at source pension and see £3,600 invested, he says.
But he points out that workplace pensions which take contributions directly from an individual’s payroll will not accept them from the bank account of an employee or from anyone else’s account.
‘Making contributions into the workplace pension of another may not be as direct or as simple as you may want. The conditions associated with different workplace pensions need to be understood when contributions are being considered.’
2. It’s usually best to max out your own pension first
‘For the majority, it makes sense to focus first on maximising your own pension provision, from which you and others can benefit in later life’ says McQueen
‘For those who have already maximised their own pension provision, supporting the pension provision of another is worth good consideration, often with the support of a financial adviser.’
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
3. Take advantage of pension tax relief
Pension tax relief allows everyone to save for retirement out of untaxed income. You receive rebates, effectively free cash from the Government paid into your pension, based on your income tax rate of 20 per cent, 40 per cent or 45 per cent.
How much tax relief each partner can receive needs to be given careful thought before you contribute extra into a pension.
McQueen explains: ‘If one partner has already maximised their own pension tax benefits, by maximising their annual allowance or having reached the lifetime allowance, contributing to another’s pension would be a means of accessing the other’s tax benefits, and thereby increasing the combined pension tax benefits.
If you are already contributing the annual maximum of £60,000 into your own pension, contributing to another’s pension could increase this annual contribution by up to another £60,000, taking the total annual pension contribution to a total of up to £120,000.
But McQueen cautions: ‘The tax benefits associated with each pension are dependent upon the income of the owner of that pension.
‘You may be a higher-rate taxpayer, and will therefore benefit from higher-rate pension tax relief against any contributions you make into your own pension.
‘If, however, the other person into whose pension you are saving is a basic rate tax payer, or pays no income tax whatsoever, their pension will only benefit from basic rates of pension tax relief.
‘The possibly different tax treatments of different pensions need to be considered and understood before acting.’
For example, McQueen says if someone who is a higher rate tax payer pays into a basic rate taxpayer’s pension, that means they only get basic rate tax relief added.
‘From a financial perspective it makes more sense to pay into the higher rate tax payer’s pension,’ says McQueen. ‘If they are both basic rate tax payers then there is no difference in cost between paying into one pension versus another, so one person making a payment into the other’s plan is fine.’
4. Each partner owns their pension and controls it
Ray Black: Building savings for retirement in both partners’ names rather than just one provides for a more tax efficient joint income in retirement
‘Any contributions into another’s pension will be owned by that other person,’ says McQueen. ‘Without their own pension savings, this other person will be dependent upon others for their income in retirement.
‘By contributing to the other’s pension, you are boosting their self-reliance and independence in later life.’
But he goes on: ‘Regardless of who may make contributions to a pension, it is the owner of the pension – the one who’s name is on the policy – who will have control over if, how and when the money is accessed.
‘Plans for access that are set at the time of making the contributions may change over time if the nature of the partnership changes over time. For example, if the partners separate or get divorced. This separation of ownership needs to be understood when contributions are being made.
‘Other than on divorce or death it’s not possible to transfer a pension pot from one partner to another.’
5. Plan around the ages when you can access your pensions
You cannot access a workplace defined contribution or private invested pension before the age of 55, and this will rise to 57 in 2028.
With final salary pensions, it depends on the rules of the scheme, so you you will have to check.
It is therefore sensible to plan ahead together on the basis of when each partner can start drawing on their pensions.
McQueen says: ‘It is the age of the owner of the pension that matters, not the contributor to the pension.
‘The contributor may be 55, but the owner may be younger. It is the owner’s age that matters. The limitations in accessing pensions need to be understood before making contributions.’
6. Don’t forget your state pensions – try to max out both
Alistair McQueen: Contributing to another’s pension before your own financial wellbeing has been sorted could be counter-productive, if it means a shortfall in your own financial resilience later in life
Like a traditional final salary pension, the state pension provides a guaranteed income until you die, so it is worth both partners maximising what they get.
The full state pension is currently worth £203.85 a week or around £10,600 a year if you retired since April 2016 and qualify for the full rate.
You can fill gaps in unpaid or underpaid National Insurance in previous years, and make voluntary top-ups to buy extra qualifying years, if one partner doesn’t have the 35 years of National Insurance contributions to get the full amount.
You might also be able to earn credits if you are a parent or grandparent looking after children, or are a carer or are unemployed.
Black says: ‘For couples with younger children who are able to claim child benefit payments, NI credits will count towards the 35 years of contributions that are currently needed in order to receive a full state pension.
‘Credits are only awarded to the individual whose name the child benefit is in and they are only available until your youngest child is 12.
‘However, this is a great help towards the level of state pension that individual will receive and applies even if that person is not earning.
‘As long as the child benefit is paid to the correct individual, they are added to your National Insurance record automatically.’
If the ‘wrong’ parent claimed child benefit you can swap the credits to the other partner, and you can also transfer credits to a grandparent looking after children if you don’t need them because you are paying NI anyway.
7. What happens to pensions if you get divorced
‘Unfortunately, not all relationships last forever,’ says Black. ‘If you are paying into your partner’s pension plan and the relationship breaks down, it may be difficult to do anything else but write that money off.
‘If you are married, regardless of who paid the money into which pension plans, they are often taken into account on divorce.
‘There are options available to divorcing couples that including sharing all of the accrued values, offsetting pension values against other assets and legal promises to pay an income or capital to either or both of the partners divorcing at a later date.
‘However, these options can be complicated and difficult to work through for both the divorcing couple and their legal advisers. In many cases, specialist pensions advice will be required to ensure that both partners are treated fairly.’
Black adds that in his experience, couples who discuss their pension plans amicably on divorce are much more likely to achieve a good outcome for all involved.
‘This could actually be relevant to not just the divorcing couple. With pensions having become multi-generational planning tools in recent years, the decisions made about pensions in a divorce can potentially affect the couple’s children and even there grandchildren.’
More on how pensions are split in a divorce
If you unfortunately split up, but your pension pots aren’t too unbalanced – as they historically have been between men and women, mostly due to pay differences and the latter doing unpaid caring work – there can be less hassle and hostility over dividing them.
There are three main options when dealing with pensions in a divorce – sharing them on a clean break basis, one partner earmarking some of the income to be paid to an ex-spouse after retirement, and offsetting their value against other assets.
Speedy ‘no fault’ divorces were introduced in 2022 This means couples are able to get divorced within six months of first applying even if one partner is opposed, and the process will be largely online – including the serving of divorce papers by email.
However, financial settlements including pensions are still dealt with in a separate and parallel process which can continue after the divorce is final.
8. Plan ahead if you want to bequeath your pensions
‘Pension savings do not form part of your legal estate, so are not subject to the same inheritance tax laws as other assets,’ says McQueen.
‘For many, saving in a pension is therefore an efficient and legitimate way of limiting inheritance tax liabilities.
‘By contributing into another’s pension, in addition to your own, you are able to shelter more of your wealth from inheritance tax.’
Black says: On death, investment based pension plans can be passed on to partners, (or someone else, that person doesn’t even need to be related) very tax efficiently.
‘If the deceased partner died after the age of 75, income tax may be payable on capital and regular income payments. However, income tax is only payable on the amount withdrawn in each tax years and dependent on the recipient’s individual income tax rate.
‘Even better, if the deceased partner died before reaching age 75, under the current rules, the surviving partner (or someone else) can move the deceased persons pension plan in to a plan called a ‘successors” pension plan and draw income and capital out without incurring an income tax liability.’
However, beware that the rules might change – and perhaps as soon as April 2024.
The Treasury is currently considering levying income tax on withdrawals from pensions inherited from younger savers too, though there is uncertainty over how taking the pot as a lump sum might be treated.
Black says money held in a pension doesn’t need to be left to a partner, but can go to children, grandchildren, great grandchildren, a best friend, a charity, or even your next door neighbour.
But he stresses the importance of completing a ‘nomination of beneficiaries’ form to let your pension provider know to whom you would like the pension money paid.
Schemes do take account of your expression of wishes, but retain discretion depending on the circumstances.
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