For most people a pension is the cornerstone to financial freedom in retirement. So when it comes to financial planning maximising your pension contributions should always be a high priority. But there are also ways to boost your partner’s pension and enjoy tax rewards. George Howard, our Chartered Financial Planner in Dubai, takes a look.
Creating a solid pension pot is a top priority for many people. In recent years there’s also been increased awareness of the issue that many women face when trying to grow their pension savings – with the gender pay gap and gender pension gap both playing their part. If you’re part of a couple you have the ability to pay into one another’s pension. This can be particularly helpful for a number of reasons; it can help maximise tax relief, reduce possible future tax payments and offset any pension gaps. This approach can also be particularly useful if you and your partner pay tax at different rates or have hit the £60,000 annual allowance which currently applies when it comes to pension savings.
Maximising tax relief
If you or your partner pays tax at the higher rate, paying into a pension means you can enjoy higher rate tax relief. In reality this effectively means additional contributions – free of charge – with the Government providing up to 45% tax relief. Basic rate tax relief is provided at source, while the additional tax is offset or refunded through your Tax Return when making personal contributions. Company pensions tend to provide full tax relief at source.
Boosting retirement savings
If your partner isn’t currently working there’s the option to pay up to £2,880 per year into their pension, which the government will top up to £3,600. This can be a very tax efficient way of using spare funds, particularly if one of you is taking a career break to raise children or care for family members. With the news that women typically need to work for an extra 19 years to retire with the same pension savings as men paying into a partner’s pension, if they’re not working, can help begin to tackle this inequality and also offset the pay gap which tends to affect women too.
Improving financial resilience
If you’re thinking ahead to retirement, it’s worth considering how much you or your partner are likely to rely on one another’s pensions. Could you cope financially with just your pension to rely on? Could your partner? For many people retirement plans might be seriously restricted without both pensions available so boosting your savings as a couple could be a significant factor when achieving financial freedom.
How much tax relief can be achieved?
There’s a very compelling argument to boosting your partner’s pension over the long-term. Consider the impact if you contributed £3,600 every year since the scheme began in 2001. The total contributions you’d have made to date would top £65,726 with the Government boosting this figure by over £17,000 – resulting in a total pot of £82,800.
Are there any restrictions?
Anyone can make pension contributions on someone else’s behalf, so as well as supporting your partner you can also pay into your children’s pensions, which can be an ideal way to start to share your wealth down through the generations, from the moment they are born.
Each year you have the ability to pay up to £60,000 into your own pension, or 100% of your earned incomes (whichever is lower). Do note that rental income cannot be included. If your partner is not fully utilising their pension annual allowance you can top up their pension too. These rules are complex and do take into account annual allowances, so you can’t double up on the contributions made (you can’t pay two times £60,000). Employer contributions are also taken into account when working out the maximum that can be paid in. The last thing to consider is, if you are a high earner, once your income exceeds £200,000 your allowance reduces by £1 for every £2 your adjusted income rises above £260,000. Your annual allowance can also taper to a minimum of £10,000 per annum.
Minimising tax in retirement
Pension payments – when you start to take them as retirement income – can attract tax. Although, subject to limits you can take up to 25% as a tax free lump sum, you’ll face tax on your pension at the same rate as your annual income – basic at 20%, higher at 40% and additional at 45%. You can take your tax free element as a monthly income, paying tax on some of the income. It can therefore be extremely beneficial to boost a partner’s pension pot rather than push yourself into a higher tax bracket when you reach retirement. In effect this might mean that even though your overall household income would be the same, you’ll potentially pay less tax, giving you more in your pocket.
What happens if you divorce or separate?
If you divorce, your pensions will be assessed as part of any settlement. If you’ve made contributions to your partner’s pension, but don’t have any written agreement noting the details, things could become complicated. Also bear in mind that Pension Sharing Orders can take indirect contributions into account so a non-working spouse who has run the household while the other works can be deemed to have contributed to their partner’s pension too. As a result it’s better to build independent retirement pots to help reduce the likelihood of a need to split pensions if you separate. And if you’re not married do be extra cautious; your rights are not the same so it’s important to make sure everything is in writing and there’s less opportunity to rely on one partner’s pension at the expense of building your own.
To discuss any aspect of your retirement planning, including pensions, please contact your nearest office.
