Slash tax bills in retirement by paying into your partner’s pension

Couples who tackle retirement savings together can increase their retirement income by thousands.

There is a big difference in the amount that men and women typically save for retirement.

Women in their mid-50s have saved a third less than men for retirement, according to official data.

This is mainly due to the fact that women are paid less on average than men, and because they tend to fall behind on their savings in years when they stop working to care for children or elderly relatives.

But a spouse can collapse his partner’s pension while he’s not working to make sure he doesn’t miss out financially later in life.

In addition, building up pension savings in the name of both partners – instead of allowing one spouse to build up a much larger pension – can have major tax advantages.

When do you then pay in to your partner’s pension? And would you ever have to pay in theirs instead of your own?

Anyone can contribute to their partner’s private pension, but the amount cannot exceed the recipient’s annual salary. This can be a useful way to ensure that you both have your own pot of money when you retire, even if one of you has taken time off from work.

By building up two pensions, you are each responsible for your own spending habits and you have more flexibility over your finances when you retire.

Ian, Sarah Birch’s husband, has been paying for her pension for 20 years. He started 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 parent to their seven children and had no pension of her own.

Ian pays through work into a defined benefit plan and plans to retire next year. Sarah’s own pension pot is currently worth almost £80,000. “It was Ian’s suggestion, and I feel happier knowing I have my own retirement savings,” she says.

By participating in a partner’s pension, you can also reduce your total tax burden. You can claim tax relief for all the money you deposit into a pension, whether it is your own pension or someone else’s.

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

This makes it an attractive option if one of the partners is a higher earner, because by contributing to their pension, the person with the lower tax rate may benefit from additional tax relief.

Each year you can save up to €60,000 for your own retirement while taking advantage of tax relief. In addition, you can pay up to £60,000 or the equivalent of your partner’s annual salary into their pension, whichever is less.

If your partner is not working, you could still pay up to £2,880 a year, which would rise to £3,600 after applying for tax relief.

The pension provider claims this tax reduction on behalf of the recipient of the money and automatically adds it to his pension pot.

However, this does not apply to higher rate exemptions to be reclaimed from HMRC.

Income tax must be paid on the income you receive from your pension after your 55th birthday. The first 25 percent is tax-free.

In that case, you will receive the annual tax-free personal allowance, now € 12,570. After that you pay 20 per cent, 40 per cent or 45 per cent tax, depending on your total retirement income (rates are different in Scotland).

By distributing your income streams fairly, you can make optimal use of the personal allowance and pay less tax.

For example, if you’re aiming for a family income of £55,000 a year at retirement, it’s more tax-efficient for two people to use separate pensions for this, as you’ll start paying 40 per cent tax once your income exceeds £50,270. .

Splitting the income leaves both taxpayers with the base rate, meaning around £5,000 is not taxed at 40 per cent on one income.

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

Gary realized that if he continued to pay his private pension, he would pay 40 per cent tax on part of the income he receives in retirement, while his wife Elizabeth would not use her entire £12,570 personal deduction.

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

This brought the value of her total pension to £150,000. She now takes £12,570 a year (plus an additional £4,167 tax-free; you can take the first 25 per cent of your pension without paying tax).

This continues until she receives state pension at age 67, at which point she reduces the amount she takes from her personal pension to keep the tax burden low.

Bianca Capstick, 38, is now weighing whether she is going to collapse in the partner’s pension. Her partner Matt, 32, works in nuclear power and his employer has a generous retirement plan that he has paid into for 11 years.

As a freelance PR consultant, Bianca receives no employer contributions, so she pays her own personal pension.

Bianca is a basic taxpayer; Matt is a higher taxpayer. They were able to recover more tax relief through self-assessment if she paid a personal pension on his behalf than if she paid her own pension.

Their dilemma is that Matt’s pension is on track to exceed £1 million by the time he retires.

Until April this year, the amount you can save tax-free for retirement over the course of your life was limited to £1,073,100. On top of that, you had to deal with a tax burden of up to 55 percent upon retirement.

The lifetime benefit was abolished earlier this year, but the Labor Party has threatened to reintroduce it if it wins the next election.

In the event that the cap comes back in, Matt and Bianca could get stabbed if they only put their savings into Matt’s retirement pot.

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

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

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

He says, “In the event of a breakup, Bianca or Matt’s contributions would not be protected.

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

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

moneymail@dailymail.co.uk