Should I pay into my partner’s pension?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
How can you keep more of your money in retirement? Whilst it may sound strange to think about putting money into another person’s pension, it could help your household tax, overall, on tax – potentially letting you enjoy a higher collective income.
Below, our financial advisers in Grantham explain how paying into a partner’s pension can work for a joint retirement plan – and some issues to consider. To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Why would I put money into a partner’s pension?
It all has to do with tax relief. In 2023-24, each person is entitled to put up to £60,000 into his/her pensions (or, up to 100% of earnings – whichever is lower). The contributions can then receive tax relief, equivalent to the taxpayer’s highest marginal rate of income tax.
This opens up some interesting possibilities for tax planning and retirement planning. For instance, suppose you are a basic rate taxpayer (20%) and your spouse is a higher rate taxpayer (40%). There could be an advantage to both of you contributing to the latter’s pension.
First of all, your partner’s annual allowance will be higher than yours. If your income is £20,000, for instance, then this will be your yearly “cap” on pension contributions. However, if your spouse earns £50,000 per year, then they could put up to this amount into their pension.
Secondly, your spouse enjoys more tax relief – which means that their contributions stretch further. For them, the tax relief is 40%. For you, as a basic rate taxpayer, it would be 20%.
Of course, if the roles were reversed (i.e. you are the higher rate taxpayer), there could be a case for both of you focusing on contributions to your pension.
The end result could be a bigger pension pot for you both to enjoy in retirement.
What about the State Pension?
Not only is each person in a relationship entitled to his/her own annual allowance (for pension “pots”). Each of you can also build up your own State Pension – potentially letting you enjoy two incomes from the government in retirement.
In 2023-24, the full new State Pension is available once someone reaches their State Pension age and has 35 “qualifying years” of National Insurance (N) contributions on their record. This currently offers £203.85 per week – or, £10,600.20 per year.
Suppose a husband and wife are both 65. The former already has 35 qualifying NI years under his belt. The latter has 25. They are both set to reach State Pension age in one year.
The husband already qualifies for the full new State Pension. His wife, however, is 10 years short on her NI record. To let her also qualify, they could both consider making voluntary NI contributions to the wife’s record.
Given that it costs £824 to fully “plug a gap” in a missing year, the full investment could be £8,240. Yet each year purchased could add £302.64 each year to the wife’s pre-tax state pension. As such, each year starts to pay for itself around two and a half years later.
Risks & issues to consider
These ideas can be great if you both stay together. Yet what happens if you split up or if your partner dies before you?
In the latter scenario, the surviving spouse or civil partner can inherit any pension pots – as well as any unused inheritance tax (IHT) allowance. Pension pots sit outside of an estate for IHT purposes, so the taxman will not be entitled to anything if these transfer to you.
However, it is important that a legally-sound will is in place to protect a surviving spouse/partner. Without one, the deceased’s estate will be dealt with under the UK’s intestacy rules, which may not distribute the assets in an ideal way.
Unmarried couples should be especially careful. Here, a surviving partner’s claims to the deceased’s estate are weaker under the intestacy rules.
Even with a will, moreover, the surviving partner may not enjoy an IHT transfer of assets from the deceased’s estate. The marital deduction is not available to unmarried couples.
Separation is becoming more common in retirement and individuals should prepare for this possibility by educating themselves about Pension Sharing Orders. These dictate how courts should divide pension assets in the event of divorce.
The three main options in this scenario are pension attachment/earmarking, pension sharing and pension offsetting. The suitability of each one depends on your personal preferences and circumstances. So, consider talking through these together with a financial adviser.
If you want to contribute to a partner’s pension, keep a clear written agreement which tracks how much you have paid over the years.
Unmarried couples should be extra wary, however. If you contribute to your partner’s pension and the relationship ends, then there are far fewer legal protections to get your money back.
Moreover, any contributions you have made would likely be classed as “gifts” – potentially leaving them liable to inheritance tax (e.g. if your gift totals over £3,000 in a given tax year and you die within 7 years of making the gift).
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
