Wife's Pension

Hal17

My wife and I were recently both made redundant and decided to retire early rather than look for new jobs to help look after her ageing parents.

I arranged a drawdown pension, took my tax free sum and will take income from the fund in about 2 - 3 years. We are both 59.

My wife has a pension pot of only £30K and she could potentially pay in an additional £20K on the 3 year back rule. We want to maximise her personal allowances when she draws her pension in the future.

Would it make sense take this sum from savings (we have both used our ISA allocation) and currently have this sum available over and above any living expenses we require in the next 5 years. It seems to make sense to get the tax relief and to make a large contribution to pension, but I am not sure if we need to consider anything else.

Appreciate any thoughts please.

kidmugsy

Hal17 wrote: »

My wife has a pension pot of only £30K and she could potentially pay in an additional £20K on the 3 year back rule.

She can do that only if she earned £20k this tax year, over and above any pension contributions she'd already made. But I assume that she didn't, from your mention of "the 3 year back rule". Suppose, for illustration, she earned £15k this tax year and contributed £1k to a pension. Then she can now contribute a further £14k gross. The actual sum she'd hand over is 0.8x£14k; the pension provider claims back the other 0.2x£14k from HMRC.

She could consider also contributing up to £3600 per annum gross (i.e. £2880 net) for each of the next few tax years.

The thrust of your idea (i.e. to maximise her future use of the personal allowance against income tax) is very sound. In fact, is there any reason why she shouldn't start drawing down some income from her pension more or less immediately? After all, if she effectively cancels out her earnings by making a pension contribution, she will have her whole personal allowance available in this tax year.

By the way, she is allowed to recycle as much pension income as she likes into new pension contributions, but there are limits on how much of her tax-free lump sum she's allowed to contribute. I'm afraid that you might need to read up on that.

Hal17

Thanks kidmugsy, I really appreciate you taking the time to post a reply and your advice. You are correct in your assumption, and I have made an error in the £20K. I think we will just do the £2,880 for the next few years.

On the pension income, I had not intended to draw an income from my pension, but if I am correct you mentioned that pension income is the same as earned income? So if I was to draw £15K from my pension could I make a pension contribution of £15K and get tax relief on this.

Thank you again.

kidmugsy

Hal17 wrote: »

I am correct you mentioned that pension income is the same as earned income? So if I was to draw £15K from my pension could I make a pension contribution of £15K and get tax relief on this.

Afraid not; pension income doesn't count as earnings. But you do have earnings in this tax year so you could count them as justifying a pension contribution in just the way that I outlined for your wife. Thereafter you too could contribute the £2880 (net) per annum even if you have no earnings in those future tax years. Just make yourself aware of the anti-recycling rules. (In my view these rules are silly and obsolete, so it might even be that the Chancellor will scrap them - keep an eye on his "Autumn Statement" on December the 4th; you can surely delay action until after that?)

A further thought: "We are both 59". It might be worth comparing your wife's birthdate with the one that determines whether she will, in due course, be getting the old-style State Retirement Pension, or the proposed new-style one. There are two reasons for this.
(a) She might like to work out whether she would gain by making extra National Insurance contributions to buy "more years" in the scheme. If she already has 35 years credited, or will have 35 credited by the time she draws SRP, then there would be no gain. The system is complicated, particularly if she has had time out of the labour force to raise children, so it might be best to get in touch with The Pensions Service to get their official forecast of her SRP.
(b) If it turns out that she is going to get the old-style SRP, she might want to consider deferring applying for it, if you can both afford that. The reason is that for every year for which she defers drawing it they will pay her an extra 10.4% on her SRP when she does begin to draw it. This is a good deal (assuming she is not in poor health or from a short-lived family); too good - the reward is probably going to be halved for people getting the new-style SRP, in which case it'll probably not be worth it.




Good luck with the Aged Parents: we went through that.

Hal17

Thank you so much for all your help and kind footnote. I really do appreciate your valuable time and help, this has really helped me.

woolly_wombat

Hal17 wrote: »

My wife has a pension pot of only £30K and she could potentially pay in an additional £20K on the 3 year back rule. We want to maximise her personal allowances when she draws her pension in the future.

Appreciate any thoughts please.

The carry forward rules are detailed on the HMRC website:
http://www.hmrc.gov.uk/pensionschemes/calc-aa.htm

Extracts:

"This guide helps you work out your tax charge if your total pension savings for a tax year are more than the annual allowance. It explains how you can reduce the charge if you have any unused annual allowance from the previous three tax years. This guide only covers the rules from 6 April 2011 - different rules applied before this date."

......

"Carrying forward unused annual allowance
If your total pension savings for the tax year are more than the annual allowance you can carry forward any unused allowance from the previous three years to the current tax year. You only have to pay tax on any amount of pension savings in excess of the total of:

• the annual allowance for the tax year
• any unused annual allowance you carry forward from the previous three years

You can only carry forward unused annual allowance if during the tax year you were in either:

• a registered pension scheme
• an overseas pension scheme and either you or your employer qualified for UK tax relief on pension savings in that scheme

There’s a strict order in which you use up your annual allowance. First you use the annual allowance from the current tax year followed by any unused annual allowance from the previous three tax years, using the earliest tax year first."


WW