Allocating pension contributions amongst a couple

BuildTheWall

I am a higher rate taxpayer while wife pays basic rate. If I look at current tax savings only, obviously makes sense to increase my contributions rather than hers, as I get the benefit of 42% vs 32%, including NI. But that might mean her pension might not grow enough in the future to take advantage of full tax free withdrawal (say 16k every year) when she retires (she’s likely to retire earlier). Any suggestions on getting this balance right? 

Dazed_and_C0nfused

Do either of you get Child Benefit?

Anonymous101

I can't speak about the balance as that's something we struggle with too. We're in a similar position with quite a difference between our earnings and increasingly pension pots.
The only thing I can think is to try and frame it differently. Instead of thinking about the 42% vs 32% on the way in think about 20% vs 0% on the way out? This still doesn't work for us as my contributions are through Sal Sac but Mrs Anon's are just a SIPP so its more like 42% vs 20% on the way in.

jamesd

Long term she'll probably get a state pension of say 9k. That means 3.5k of unused personal allowance. Until age 75 she can pay in 2880 a year with tax relief to fund drawing 3600, 900 tax free, 2700 taxable. So over the cycle looks like this:

retirement aged 55 or later to SPA, 12500 - 2700 = 9800 to use.
SPA through 75, 12.5k - 9k - 2.7k = 800 to use.
Age 75 on, 12.5k - 9k = 3.5k to use.

Ignoring growth except enough to cover inflation and assuming retirement at 55 with SPA 67 and death at 90 produces these chunks:

12 years of 9800 taxable, 13067 combined = 156804.
8 years of 800 taxable, 1067 combined = 8536.
15 years of 3500 taxable, 4667 combined = 70005.

Adding those up gives a very cautious target of an age 55 pot of 156804 + 8536 + 70005 = 235345.

But up to 1250 of personal allowance can be transferred and it's best to do this to get the 42% relief. Adjusting for this cuts the amount by (12 + 15) * (1250 / 3 * 4) + 8 * 1067 = 53536.

That cuts the target to £181,809. Considerably lower than the 16k/year for 35 years 560k need.

How does her expected pot size compare to £181,809?

zagfles

Anonymous101 said:

I can't speak about the balance as that's something we struggle with too. We're in a similar position with quite a difference between our earnings and increasingly pension pots.
The only thing I can think is to try and frame it differently. Instead of thinking about the 42% vs 32% on the way in think about 20% vs 0% on the way out? This still doesn't work for us as my contributions are through Sal Sac but Mrs Anon's are just a SIPP so its more like 42% vs 20% on the way in.

Should be 15% on the way out if in basic rate band, as 25% of the pot is tax free. So 20% tax on 75% of the pot is an effective tax rate of 15%.

So for OP 42% in 15% out, for OP's wife 32% in 0% out. Or easier to look at net of tax amounts so for OP the pension benefits is 85/58 (1.4655) and for OP's wife 100/68 (1.4706). So pretty much the same, very slightly better for wife, up until the point there's enough to use up her PA in retirement.

jamesd

If you only get 2% NI saving you're not optimising fully because you can get 12% on much of the money. NI is worked out for individual pay periods, income tax annually. Concentrate your sacrifice into as few pay periods as possible and most of the sacrifice will save you 12%.

BuildTheWall

Dazed_and_C0nfused said:

Do either of you get Child Benefit?

No, we don’t. 

BuildTheWall

jamesd said:

If you only get 2% NI saving you're not optimising fully because you can get 12% on much of the money. NI is worked out for individual pay periods, income tax annually. Concentrate your sacrifice into as few pay periods as possible and most of the sacrifice will save you 12%.

True, need to get the timing right. Will start doing that from Feb. 2 months of higher contributions for this year and 2 months of next year, so back to normal contributions from June. 

BuildTheWall

jamesd said:

Long term she'll probably get a state pension of say 9k. That means 3.5k of unused personal allowance. Until age 75 she can pay in 2880 a year with tax relief to fund drawing 3600, 900 tax free, 2700 taxable. So over the cycle looks like this:

retirement aged 55 or later to SPA, 12500 - 2700 = 9800 to use.
SPA through 75, 12.5k - 9k - 2.7k = 800 to use.
Age 75 on, 12.5k - 9k = 3.5k to use.

Ignoring growth except enough to cover inflation and assuming retirement at 55 with SPA 67 and death at 90 produces these chunks:

12 years of 9800 taxable, 13067 combined = 156804.
8 years of 800 taxable, 1067 combined = 8536.
15 years of 3500 taxable, 4667 combined = 70005.

Adding those up gives a very cautious target of an age 55 pot of 156804 + 8536 + 70005 = 235345.

But up to 1250 of personal allowance can be transferred and it's best to do this to get the 42% relief. Adjusting for this cuts the amount by (12 + 15) * (1250 / 3 * 4) + 8 * 1067 = 53536.

That cuts the target to £181,809. Considerably lower than the 16k/year for 35 years 560k need.

How does her expected pot size compare to £181,809?

thanks for the comprehensive calculation. 

Is there any reason why the 3.6k is assumed to be withdrawn immediately? Is it to keep things simple by circulating the same money? 

So the target is 180k by the time she is 55, assuming current tax laws and benefits. Thanks a ton! 

Bemma

I have been through this very calculation myself.  Here are the permutations I calculate that pertain to myself…

As shown above by @Zagfles and in the table below, there's very little in it.  You both get an uplift of 1.47 (to two decimal places) for money on the way out of your pensions. 42% on the way in and 15% on the way out or 32% on the way in and 0% on the way out, result in more practically the same.  Rows 1 & 5 below.

 

But as inferred by @Dazed do you pay HICBC (rows 3 & 4)?  And by @jamesd you can optimize NI to do better than 42% on the way in (rows 2 & 3). 

So basically there's very little in it, unless you can optimize NI or receive child benefit (* see below)

In the table above, I have 2 children, HICBC is roughly 10% for first child and 8% for subsequent children.  Which results in very high uplift factors for myself. Some one on 20% is way behind.

 * A further consideration is do you receive any employers NI contributions?  I receive 7%, so my actual figures are 7% higher than the above, that's just another variable which would make the table above unwieldy.

jamesd

BuildTheWall said:

Is there any reason why the 3.6k is assumed to be withdrawn immediately? Is it to keep things simple by circulating the same money? 

Just to keep things simple. She'll be paying in and withdrawing so withdrawing is happening and using the allowance anyway. Getting it out eventually has to be budgeted for and that was easiest.