Couples can enhance their retirement security by adopting a joint strategy for pension saving, though careful consideration of tax implications is essential, according to financial experts.
The advice centers on prioritizing the maximization of each individual's pension contributions before focusing on a partner's, with specific circumstances where concentrating on the higher earner's pension makes financial sense.
Maximizing Employer Contributions
Experts recommend starting by ensuring both partners take full advantage of employer matching pension contributions. These contributions are often described as "free money," supplemented by government tax relief. However, individuals must be aware of the nuances of tax relief. Ray Black, managing director of Money Minder, stresses the importance of not relying on a single partner's pension savings, even if only one partner is employed. He notes that building retirement savings in both partners' names can lead to a more tax-efficient joint income in retirement.
For a non-working partner, such as a stay-at-home parent, it is possible to contribute up to £240 per month net into a pension plan. This contribution can receive a 25% uplift through tax relief, bringing the total saved to £300 per month, available up until age 75.
Contributing to a Partner's Pension
Alistair McQueen, head of savings and retirement at Aviva, points out that contributing to a partner's pension is feasible and can offer significant benefits, potentially boosting long-term financial well-being and increasing combined pension tax benefits. However, he cautions against contributing to a partner's pension before one's own financial stability is secured, as this could lead to a shortfall later in life. He also highlights that the relationship dynamics may change by the time pension savings are accessed.
Scheme Flexibility and Tax Relief
Individuals can theoretically contribute to each other's work pensions up to their annual salary or £3,600 per year if not working, provided the pension scheme allows it. The process can differ based on whether the scheme is 'net pay' or 'relief at source.' For pensions using 'relief at source,' which includes most personal pensions and some master trusts, a third party can contribute up to £3,600 gross (£2,880 net) and receive tax relief regardless of earnings. This means a partner could contribute £2,880 to a non-working partner's pension, resulting in £3,600 being invested.
Workplace pensions that deduct contributions directly from payroll typically do not accept contributions from an external bank account or a third party. Therefore, understanding the specific conditions of different workplace pensions is crucial when considering contributions.
Prioritizing Personal Pension Maximization
For most individuals, the primary focus should be on maximizing their own pension provision. Only after an individual's pension is fully maximized should supporting a partner's pension be seriously considered, often with guidance from a financial advisor.
Understanding Pension Tax Relief
Pension tax relief enables individuals to save for retirement using untaxed income, with the government providing rebates based on income tax rates. The amount of tax relief a partner can receive requires careful consideration. If one partner has already maximized their annual allowance or reached their lifetime allowance, contributing to the other's pension can unlock additional tax benefits. For instance, a higher-rate taxpayer contributing to a basic-rate taxpayer's pension will only receive basic-rate tax relief on that contribution, making it financially more sensible to contribute to the higher-rate taxpayer's pension. If both partners are basic-rate taxpayers, the cost difference is negligible.
Ownership and Access
Contributions made to a partner's pension become the property of the pension owner. While this boosts their self-reliance, the pension owner retains control over how and when the funds are accessed. Plans made at the time of contribution may change if the relationship status changes, such as in cases of separation or divorce. Generally, pension pots cannot be transferred between partners except in cases of divorce or death.
Access Age and State Pensions
Access to private and workplace pensions is typically restricted until age 55, rising to 57 in 2028. The age of the pension owner, not the contributor, dictates when funds can be accessed. Both partners should also aim to maximize their State Pension entitlements. This involves ensuring 35 years of National Insurance contributions. Voluntary top-ups can fill gaps in contributions. For couples with young children, National Insurance credits can be earned towards the State Pension by claiming child benefit, with these credits awarded to the person named on the child benefit claim until the youngest child turns 12.
Divorce and Inheritance Considerations
In the event of a divorce, pension assets are typically considered. Options include sharing accrued values, offsetting pension values against other assets, or making legal promises for future income or capital payments. These processes can be complex and often require specialist advice. Unspent pensions will become liable for inheritance tax from April 2027, impacting estate planning, particularly for those who die before age 75 when such funds are currently tax-free. Completing a 'nomination of beneficiaries' form is crucial for directing pension funds upon death, though pension providers retain discretion.