Tactical Divorce - Tax Avoidance or Tax Planning?
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Thanks for all the input and I think I can let the Wife know I won’t be engineering a divorce for financial reasons.
The complexity, IHT on death and the fact that it is probably tax avoidance means I’ll have to explore other ways of trying to manage our joint retirement planning versus tax situation.
I don’t think our situation is all that common and whilst it is a nice problem to have in the future I would value any suggestions on how we can maximise our retirement financial planning both pre and post retirement :
1. My SIPP is on track to be ~ £1m in real terms when I plan to take it at 57 (16 years away). If I maintain current level of contributions a real return of ~ 3.2%pa would result in me exceeding the LTA. If I stopped contributions into my pension today then a real return of just under 6% would result in exceeding the LTA.
2. To the point in 1 it’s not worth reducing/stopping my pension contributions as long as my company continue a 1:1 contribution match.
3. In addition, my taxable income is now starting to get just above £100k each year and at the 60% marginal rate of tax I am putting anything above £100k into my SIPP as AVCs even though I may exceed the LTA (make hay when the sun shines). I also don’t expect any government to start to raise the £100k at which you start to erode the personal allowance so this is probably going to result in my AVCs rising year on year.
4. My Wife doesn’t work and isn’t planning to any time soon. She currently contributes £2,880 into a HL SIPP that gets topped up to £3,600. I forecast that at her retirement age there will be ~£100k in this pension for us to draw down from.
5. In retirement our joint ‘number’ for spending is ~£30k per annum. Plan would be to take out of each of our pensions to the personal allowance and then top up out of ISA savings/TFLS so as to get an effective joint tax rate of 0% in retirement.
6. Problem is my Wife’s pension pot for drawdown will run out after 10-15 years so I’ll need to drawdown at levels meaning I need to pay the basic rate of tax. If I could get more pension income into my Wife’s name then it would reduce / potentially eliminate any tax incidence in retirement.0 -
IMO you're a good candidate for a tactical divorce as you're currently planning not to use your wife's tax allowance for the rest of your lives.
Divorcing, splitting the assets and doubling your joint tax allowance will make a huge difference especially as a £1m pension pot won't put you in the mega-rich category.
£2k less tax pa for the rest of your wife's life will make a difference.
Oh, and don't worry about IHT. After the divorce and the assets are split you might find it was all a mistake and decide to remarry.0 -
That's likely to be a very bad idea if rules on the LTA don't change. Say your SIPP is £1m at retirement and you take £250k TFLS and put £750k into drawdown. If you only take the PA out per year then you will be heading for a big LTA tax charge at age 75. 3% real growth and 2% inflation would be £37,500 a year. If you only take £11,500 out each year then your drawdown pot would have grown by more than £700k by age 75 and all that absolute growth would be clobbered with an LTA charge.JamTomorrow wrote: »Plan would be to take out of each of our pensions to the personal allowance and then top up out of ISA savings/TFLS so as to get an effective joint tax rate of 0% in retirement.
You really need to plan to take out pretty well your full basic rate band each year.0 -
Aren't all divorces 'tactical'? :rotfl:0
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IMO you're a good candidate for a tactical divorce as you're currently planning not to use your wife's tax allowance for the rest of your lives.
Divorcing, splitting the assets and doubling your joint tax allowance will make a huge difference especially as a £1m pension pot won't put you in the mega-rich category.
£2k less tax pa for the rest of your wife's life will make a difference.
Oh, and don't worry about IHT. After the divorce and the assets are split you might find it was all a mistake and decide to remarry.
I'm with you that £1m isn't fat cat territory particularly when it has to fund a couple, one of which gave up their career to raise their children.
Whilst it's a pity that that marriage isn't rewarded in the tax system it would hardly be an election winner to allow marital transfer of tax allowances for the relative low number of couples in our situation.
Maybe time to try and drop to a 4 day week to avoid the 60% marginal rate of tax and enjoy some time away from work in my 40s and not just my 50s.0 -
That's likely to be a very bad idea if rules on the LTA don't change. Say your SIPP is £1m at retirement and you take £250k TFLS and put £750k into drawdown. If you only take the PA out per year then you will be heading for a big LTA tax charge at age 75. 3% real growth and 2% inflation would be £37,500 a year. If you only take £11,500 out each year then your drawdown pot would have grown by more than £700k by age 75 and all that absolute growth would be clobbered with an LTA charge.
You really need to plan to take out pretty well your full basic rate band each year.
I'd completely forgotten about this which creates an even stronger argument / desire to be able to split the £1m 2 ways in a tactical divorce.
Otherwise you are right that I am going to need to draw down to the top end of the basic rate tax band each year so as to avoid the LTA charge at 75.
I suppose I couldn't employ my Wife now as a child minder, cleaner, etc so as to provide her with an income now that could all be invested in a pension for her
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Now that is an interesting thought. If she has no other income then I wonder what would stop you from paying her £150 a week, which would get her NI stamp for her without either of you paying NI, and then stick 80% of it into a SIPP or PP to get credited with relief on tax you hadn't paid?JamTomorrow wrote: »I suppose I couldn't employ my Wife now as a child minder, cleaner, etc so as to provide her with an income now that could all be invested in a pension for her0 -
Now that is an interesting thought. If she has no other income then I wonder what would stop you from paying her £150 a week, which would get her NI stamp for her without either of you paying NI, and then stick 80% of it into a SIPP or PP to get credited with relief on tax you hadn't paid?
I wonder if this has legs - sounds really interesting for those of us with annual allowance or lifetime allowance (I wish) issues - or even just to move pension contribution from my pension to hers to maximise the use of the tax free allowance in retirement.
How straight-forward is it for me to pay my spouse - would I need to be a company or perhaps she would need to be self-employed?
If all her pay goes into a pension it doesn't credits entitlement.
Say 10kpa paid to spouse pay 8k into pension grossed up to 10k in pension = 2k gain and it is in her pension not mine and due to annual allowance I can't pay in any more into my pension let alone sal sac.
Of course one can't live on zero salary every year but it can be better value to contribute big some years and small in other years.
I think it may not work though because we would lose the 2880/3600 pension allowance that we currently offset against other income for tax credits purposes with a withdrawal rate of 41% that would be expensive to lose along with the 720 of pension gain it would outweigh the income grossing up from the 10k 'salary'....I think....0 -
Though the canoeing would be fun...
- You are not so unique as you claim - many people have seen one partner raise the kids and the other earn higher rate tax and so save into the pension. Good plan with higher rate tax benefit.
- You should know what state pension your wife will get. She would get something (esp. if she works even one year and pays NI - I think).
- You can transfer some of her tax free allowance to yourself anyway (as stated already and only if not divorced).
- Your wife would not pay basic rate on her first 11.5k. BUT after taking away her SIPP and any state pension she can get from that leaves you with a rather reduced sum on which you can save tax by moving things to her after SP age anyway.
- I reckon you would be able to shift a fair chunk to her SIPP - increasing her earnings in time.
- The LTA is set to be £1M and then for now at least is set to rise with CPI - so won't be £1M in 16 years when you talk about retirement. So it is the LTA when you retire you need to figure.
- But if you did nothing and she had no pension or other income - you are talking about saving 20% of what sum is the thing to work out?
- With pot of £1M - when are you planning to enjoying it? You will have to pay some 20% tax even if you managed to split 50/50 unless you will live way past 100.
- The IHT impact seems to far outweigh any benefit? Why do you dismiss this?
You are going to pay 20% tax on some of your income. Better off pensioners pay tax too!
Finally, maybe your wife will like the idea of a divorce. I hear the canoe instructor is good looking :-)I am just thinking out loud - nothing I say should be relied upon!
I do however reserve the right to be correct by accident.0 -
I thought that in other contexts but apparently HMRC won't regard it as genuine employment. See https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm4155JamTomorrow wrote: »I'd completely forgotten about this which creates an even stronger argument / desire to be able to split the £1m 2 ways in a tactical divorce.
Otherwise you are right that I am going to need to draw down to the top end of the basic rate tax band each year so as to avoid the LTA charge at 75.
I suppose I couldn't employ my Wife now as a child minder, cleaner, etc so as to provide her with an income now that could all be invested in a pension for her0
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