Contribute more to company pension or SIPP for my wife?

arbster

I'm in the process of trying to sort out my pensions, savings and investments and wondered whether anyone could provide a clear statement (or a link to a good information source) on whether increasing my company pension contributions is better or worse than opening a SIPP for my wife.

I'm 42 and am a higher-rate tax payer, currently contributing 8% to my company DC pension, with 10% employer contribution. I plan to increase this contribution further in the coming months to ensure my taxable earnings remain below £100k. This will not result in me reaching the £40,000 limit for relief.

My wife is 45 but has no pension provision over and above the state pension, having not worked for the past 16 years. I understand that we can contribute a £2880 and get the tax relief for her.

However, it seems to me that making further contributions to my own pension is more tax efficient, due to the additional rebate from HMRC. Is this correct?

As a side note, I have a feeling that paying no tax for 16 years may have adversely impacted my wife's state pension entitlement?

greenglide

Whether your wife has paid income tax or not makes no difference to her state pension.

The state pension situation as she will reach SPa after 6/4/2016, depends on whether she will have gained 35 qualifying years by the time she reaches SPa. She "should" have got qualifying years from HRP during years of receiving Child Benefit if you have children.

Self employed contributions of voluntary contributions may be appropriate?

green_man

Certainly it may seem that the best option is to increase your own payments due to to getting 40% (or better) rebates. But it may depend a bit on what tax levels you would anticipate paying in retirement. If you would be paying at standard rate then you have a 20% benefit. Your wife would be able to draw her pension tax free so again a 20% benefit.

So the answer is I would do both. Your wife should start up a sipp and put in 2880 (3600 gross) per year. And if you can afford it also up your own contributions as near the £40000 per year limit as you can afford whilst keeping an eye on the Lifetime limit.

arbster

greenglide wrote: »

Whether your wife has paid income tax or not makes no difference to her state pension.

The state pension situation as she will reach SPa after 6/4/2016, depends on whether she will have gained 35 qualifying years by the time she reaches SPa. She "should" have got qualifying years from HRP during years of receiving Child Benefit if you have children.

Sorry, I should have said being out of employment and therefore not getting NI contributions. I will request a statement from HMRC to find out how many qualifying years she has - I thought she needed 30 to be entitled to the full state pension, rather than 35?

greenglide wrote: »

Self employed contributions of voluntary contributions may be appropriate?

This would be nice, assuming additional years are required. Presumably she'd need to set up as a sole trader or something for this to be possible?

arbster

green_man wrote: »

Certainly it may seem that the best option is to increase your own payments due to to getting 40% (or better) rebates. But it may depend a bit on what tax levels you would anticipate paying in retirement. If you would be paying at standard rate then you have a 20% benefit. Your wife would be able to draw her pension tax free so again a 20% benefit.

True - given that I'd like to end up with an annual income in excess of the higher-rate tax threshold, it would make sense to ensure we're getting the benefit of my wife's tax allowances. This may be the clincher here.

green_man wrote: »

So the answer is I would do both. Your wife should start up a sipp and put in 2880 (3600 gross) per year. And if you can afford it also up your own contributions as near the £40000 per year limit as you can afford whilst keeping an eye on the Lifetime limit.

Yes doing both would obviously be the best answer. Given that I can't afford to do that for a sustained period, I think I'll go with a SIPP for her, and a slightly lower increase in contributions for me.

jem16

arbster wrote: »

Sorry, I should have said being out of employment and therefore not getting NI contributions. I will request a statement from HMRC to find out how many qualifying years she has - I thought she needed 30 to be entitled to the full state pension, rather than 35?

30 at the moment but 35 from April 2016. However entitlement will be worked out under old and new rules - she would get the higher of the two calculations.

Has she been entitled to HRP?

arbster

jem16 wrote: »

30 at the moment but 35 from April 2016. However entitlement will be worked out under old and new rules - she would get the higher of the two calculations.

Has she been entitled to HRP?

Ah, the ever-moving goal posts...

I had to Google it to find out what HRP was. I'm not sure, to be honest - it looks like she should have been entitled, but I can't be certain she received it. Will it show up on the NI account statement?

jamesd

Since you're anticipating being a 40% income tax payer in retirement that will substantially reduce the income tax benefit of the pension for you. You'll still gain from the tax not paid on the 25% tax free lump sum in the higher rate income tax part of your income, though. And by 20% on the portion that is only taxed at basic rate, with the part within your personal allowance getting the full 40% gain.

Given that plan, I suggest that you start to investigate VCT investing. That's because the income is tax free, as are any capital gains. There is 30% income tax relief from HMRC capped at your income tax actually paid in the tax year of purchase. Tell HMRC during a tax year and they will adjust your tax code to give you the relief. If not, you claim it with your tax return. The 30% has to be repaid if you sell within five years. If you wait at least that long you can sell and buy something else to get another 30% relief, or wait six months and buy back the same thing. You can repeat this as often as desired. Seven to ten years is likely to be a better holding period though it depends on the specific VCT purchased and how it performs. There's a broad range but all invest in relatively small companies. Some use secured lending for all of most of their investing, others are pure equity, some are relatively mature companies, others are quite early stage with high loss potential for the individual companies. So don't stick to just one, diversify and bear your risk tolerance in mind.

Because the VCT income is tax free they can be a useful long term source of income for higher earners. Eventually you might get to the point where you can defer your income for at least five years and make it mostly tax free, using repeated VCT purchases to eliminate your tax bill. Unless you have substantial savings and investments already that's some way off. You wont be able to afford to defer all of your income if just getting started. To give some idea of the upper end of the VCT income potential, one of those operated by Albion pays a bit over 11% and another 10% after allowing for the effect of the tax relief on the purchase price. More usual rates are in the 56% before tax relief range, so 7-9% after.

VCTs are handy but don't do just them, diversification of tax wrappers is also goo, though personally I would change to using VCT rather than ISA sooner than I did.

jem16

arbster wrote: »

Ah, the ever-moving goal posts...

I had to Google it to find out what HRP was. I'm not sure, to be honest - it looks like she should have been entitled, but I can't be certain she received it. Will it show up on the NI account statement?

Not entirely sure if it does or not.

I would expect it to be taken into account on a state pension forecast though.

atush

If she recived CB in her name, or had caimed it before you lost it if you earn more than 60K, then yes she should have HRP. So check with DWP.

I would, if you will be paying 40% tax, start a pension for your wife using the 2880/3600 allowance in addition to whatever you do elsewhere.

Have you filled both your S&S isa allowances? Are unwrapped cash and investments in the name of the spouse who does not pay tax.

arbster

atush wrote: »

If she recived CB in her name, or had caimed it before you lost it if you earn more than 60K, then yes she should have HRP. So check with DWP.

We're pretty sure it is in her name. We've actually never got round to opting out of receiving CB, so I end up with an underpayment on my self-assessment. Does that mean she will continue to receive NI credits if I remain opted in?

atush wrote: »

I would, if you will be paying 40% tax, start a pension for your wife using the 2880/3600 allowance in addition to whatever you do elsewhere.

Will do.

atush wrote: »

Have you filled both your S&S isa allowances? Are unwrapped cash and investments in the name of the spouse who does not pay tax.

No, S&S ISA allowances are not fully used but will seek to address that before the end of this tax year. Unwrapped cash is either joint (Santander 123) or in my name because she doesn't have the appetite to juggle lots of bank accounts. I'm working on it, though.