Tax on pension

Gemius

Can someone please advise me on the following.

If a married couple have a combined income of £20,000 per year after retirement i e split between them at £10,000 each. I believe they won't pay much income tax as the allowance for each of them is about £10,000 per year.

How does this compare with a couple where the man has a pension of £20,000 per year and the wife nothing (She would of course get her share of the state pension)

Do the second couple lose because the man is liable for an amount of income tax?

jem16

Gemius wrote: »

Do the second couple lose because the man is liable for an amount of income tax?

Yes that's why it's important to plan as a couple.

dunstonh

How does this compare with a couple where the man has a pension of £20,000 per year and the wife nothing (She would of course get her share of the state pension)

It would result in extra tax of around £2000 a year compared to having £10k each.

Gemius

Thank you both for your speedy replies.

EdInvestor

jem16 wrote: »

Yes that's why it's important to plan as a couple.

I would say it's important to plan as individuals, so each has income and capital which uses up their individual tax allowances. So often you find the man has a large pension so he suffers 'age allowance clawback' and the wife has a small state pension, and more than half her allowance is wasted.

There's no need for this to happen with a bit of advance planning.But do be aware that many advisors do not talk about this issue - they are often more concerned to get clients to take advantage of more immediate tax reductions, eg by persuading high rate taxpayers to put more money into their pension now.

jem16

EdInvestor wrote: »

I would say it's important to plan as individuals, so each has income and capital which uses up their individual tax allowances. So often you find the man has a large pension so he suffers 'age allowance clawback' and the wife has a small state pension, and more than half her allowance is wasted.

That's why I said to plan as a couple Ed. If you plan as individuals you don't take into account anyone but yourself.

There's no need for this to happen with a bit of advance planning.But do be aware that many advisors do not talk about this issue - they are often more concerned to get clients to take advantage of more immediate tax reductions, eg by persuading high rate taxpayers to put more money into their pension now.

How many advisers have you actually seen Ed?

It's part of an investment specialist IFA's job to look at the big picture when retirement planning.

roddydogs

-OK to plan as couple......if you know your going to stay together!

margaretclare

roddydogs wrote: »

-OK to plan as couple......if you know you're going to stay together!

No, better to plan as 2 individuals for reasons already stated.

dunstonh

I think that is wording. When looking at retirement planning it should be done jointly by looking at both individual allowances both now and in the future.

The thing to avoid is putting it all in the husbands name or vice versa unless there is another factor that makes it worthwhile.

But do be aware that many advisors do not talk about this issue - they are often more concerned to get clients to take advantage of more immediate tax reductions, eg by persuading high rate taxpayers to put more money into their pension now.

And you make that sound like a bad thing. The extra tax relief gained can mean that a life policy could be taken out to cover spouse or that a larger pot is available upon retirement than that of basic rate relief allowing phased income drawdown and keeping the death benefits in place for the spouse. Just because you should look at it together, doesnt mean that you should always split it equally. Its an ideal aim but its not always the right way.

EdInvestor

dunstonh wrote: »

And you make that sound like a bad thing.

IMHO it often is.Some advisors encourage well off higher rate taxpayers to take out " spare pensions ", which are not intended to provide a retirement income, but rather tax relieved life cover/IHT avoidance by stealth.

To stop this, the Govt heavily taxes drawdown funds once the pensioner reaches 75 such that there is virtually nothing left on the 2nd death.This penalises ordinary people who cannot afford "spare pensions" and who have used their funds in the proper way -i.e. to provide a taxable retirement income.

This loophole should be closed off in a way that does not penalise the non-rich.