Moving 10% of personal allowance to spouse in retirement, benefits and possible drawback.

pensionpawn

michaels said:

pensionpawn said:

garmeg said:

pensionpawn said:

With a personal allowance of £3600 available until you're 75 I would imagine that any reinvesting of spare cash would initially be back into a SIPP. It would be disrespectful not to accept the offer of an £1440 (2 x £720) each year from the government. The extra £417 (from the method above) could offset some of the £2880 per person.

But only a quarter of each £720 can be taken tax free so gain of £180 each. The rest would be taxable.

I don't see how that is a problem, especially if you're not in a hurry for the £540, and even if you are you're still £612 up on the previous year.

Is this a trolling thread?

No, not a trolling thread. Why would you say that? People come here to pick up tips and suggesting that they are 'taking the pi$$' because their comments appear 'naive' compared to someone's own understanding / perspective is at best unhelpful. I have been paying into my own private pension since 1989, knowing from a young age how important they are, and how important it is to start early. I have drummed that into my children and am quite proud that my youngest has managed to build a pension fund of £2k at 19 from her own part time work in 6th form and during her gap year.  She is also dumping the maximum into a share save scheme to give her a slush fund after she hopefully graduates. However for most of the time since 1989 I was doing no more than just paying in the minimum to trigger the maximum employer contribution. Now since the pension reforms, and shortly after being made aware of SIPPs from a close friend, I found this thread and have become much wiser as a result. In life you sometimes (often?) don't know what you don't know. In fact I'm now considered as the go to guy for pension advice in the office, which shows how many people who could benefit from the discussions in these threads! As a result of what I've learnt we have focused on building up my wife's mostly neglected pension in order to achieve our goal of being able to draw both our personal allowances, as a minimum, throughout retirement. Hence my interest in the scenario I originally posted.
Please bear in mind that however daft a question sounds to the reader, it is (often) a genuine request for knowledge from the poster.

pensionpawn

zagfles said:

pensionpawn said:

zagfles said:

pensionpawn said:

zagfles said:

pensionpawn said:

garmeg said:

pensionpawn said:

Dazed_and_C0nfused said:

"you do not pay Income Tax or your income is below your Personal Allowance (usually £12,500)"

There is no such condition in the tax legislation.

The guidance you have linked to is about the benefit of Marriage Allowance, not who can be eligible.

The key thing is that neither the applicant or the recipient can be liable to higher rate tax.  So a couple both earning £40k are eligible for Marriage Allowance but are highly unlikely to benefit financially (as a couple) from applying.

If the applicants only taxable income is say £13,250 pension then they will pay tax on £2,000 of that income (at 19% or 20% depending on where they are resident for tax purposes).  There is no penalty as they are still eligible for Marriage Allowance.

Thanks for that. So if your income is above the 'reduced to 90% of tax allowance' though below the normal threshold for higher rate tax, you just pay tax at 20% on the excess? The advantage of donating 10% of your tax allowance to a spouse accessing their pension via UFPLS is that it 'magnifies' your combined tax free pension 'income' to £29583 compared to £25000 (2 x £12500). An extra £4583 (18.3%) tax free income pa.

You forgot the lower tax free cash in the non transfer scenario of £12,500 / 3 = £4,166 so you get £16,666 tax free from pension.

If transferred
£11,250+ £13,750x4/3 = £29,583

No transfer
£12,500 + £16,666 = £29,166.

The gain is therefore £417.

This is £1,250 / 3.

Not to be sniffed at, obviously.

Yes, thanks for that! I just frustratingly lost my browser tab about the article which brought my attention to this strategy. Some financial adviser exploring options for maximising tax free pension access and this was exactly the point he was making, the extra £417 pa, not the £4583 I posted in haste (which is mainly the 25% TFLS element). The £417 is the real gain from this approach. Cheers.

The gain is zero. You're just taking more of the tax free portion of the wife's pension now, so there'll be less later. 

If that's what you need it might make it a bit administratively easier than phased drawdown, but there is no magic extra tax free allowance being created.

I agree that you can't take more out of the pot than is in there, unless the pot grows, which of course we all hope it does, and at a decent rate. If the starting amount of the pot, coupled with the growth rate, supports withdrawals at £18333 pa then there is year on year gain. The pot may be smaller when you croke it, however I'm planning a retirement, not an inheritance.

The only benefit of using this method would be if the husband didn't have a big enough pot to utilise his full personal allowance every year over his retirement. And that's what the marriage allowance is designed for.

The wife can take as much of the 25% tax free portion out of the pension as she wants each year, it doesn't have to be in the form of a UFPLS, it can be using phased drawdown where some of the pot is crystallised but not drawn. Transferring the allowance just allows her to take £1250 more in taxable income without getting taxed, but at the same time reduces the amount of taxable income the husband can take without being taxed. 

It's completely neutral for couples where they both have sufficient pension to utilise their own personal allowance.

Why is there no benefit if both husband and wife have large enough pots? The husband could have a pot of £500k and chose to draw down only £11250pa because he transferred 10% of his personal allowance to his wife. The wife could have a £750k pot and draw down £18333 pa. I appreciate what the marriage allowance was designed for, however I'm just investigating other ways it can legally / legitimately be applied. I don't see how this can be viewed as tax neutral if £18333 + £11250 = £29583 (c/f £16667 + £12500 = £29167) can be sustained throughout retirement. It's an extra £417 pa whilst you're still breathing.

How many times?

The wife can draw £18333 tax free pa WHETHER OR NOT she's had a marriage allowance transfer.

Without transfer: she takes £16667 UFPLS and crystallises £6664 taking £1666 TFLS, leaving £4998 crystallised but not drawn.

With transfer: she takes £18333 UFPLS

The only difference is that with the transfer, she has been able to take £1250 more from the taxable part of the pension rather than the tax free part. But that means the husband has £1250 less he is able to take from the taxable part of his pension without paying tax. It cancels. Exactly.

25% of both pensions are tax free whenever you take them. Plus a combined allowance allows £25kpa of taxable income to be tax free. Those tax free totals stay the same whether you transfer or not. You haven't got anything extra with your little wheeze. It's such basic obvious maths that you shouldn't even need to do any calculations. It's like your last little loophole. It doesn't gain you anything.

Thank you for persisting with me. Although I knew that you could follow UFPLS with crystallisation I wasn't aware that you could mix and match in the same and subsequent tax years, so I've learnt something there, and if I can achieve the same goal by a simpler method then I'm all for that.
So I follow that in the same tax year this method can also generate £18333. However each crystallisation creates an increasing proportion of your pot that can't be accessed tax free. So depending on the size of your starting pot, growth rate, top ups (max of £3600) there is potential for the pot to become fully crystallised, limiting you to your personal allowance earlier than desired. Food for thought. I'll have to run the numbers....
Oh, I found the link to the article originally posted by a 'pensions expert' on my work laptop... https://www.moneymarketing.co.uk/analysis/ian-browne-making-marriage-allowance-retirement-plans/ 

pensionpawn

Modelling and comparing de-accumulation via UFPLS plus transferred marriage allowance against UFPLS and crystallisation only indicates that the later rapidly depletes the tax free element of the pot compared to the former. Depending on the size of the starting pot this may or may not be a problem at this level of withdrawal. That said, my analysis did uncover an issue on commencement of state pension as the UFPLS element has to shrink to avoid a tax liability. This in turn increases the crystallisation requirement (now necessary regardless, though at differing amounts) accelerating 100% crystallisation of the pot. The SP issue impacts both methods, the later more intensely. In conclusion, for our pot size, the transfer of marriage allowance allows more years at the desired withdrawal rate, although if we manage to achieve a larger starting pot or we delay withdrawal that issues significance diminishes. Thanks for opening my eyes to the option of UFPLS and crystallisation in the same tax year.