paying into my pension, wife has no pension. Would setting up a pension for my wife be more tax eff

pete1975

OK after commenting on another thread its quite clear i need some more help with playing and theres me thinking i had finally got my head around it all.
Im 46 and im have a aviva workplace pension which the company matches contributions and maxes out at 10%.  Since july 2020 i have reduced my salary via salary sacrifice to pay more into my pension.   My current pot is around 240k  and the aviva apps shows that would about 750 at retirement age (ive chosen 57) and about 23k a year.  That seems pretty good to me and i still have least 10 years to contribute to the scheme.   Im currently paying about 18% and ive worked out reducing some costs that i can from april 2021 pay 25% of my salary into my pension which is about £1800 a month so really good from all the calculators.

My wife doesnt work, she receives a carers allowance for looking after family member who has MS,  she had a great job years ago in finance but wanted to look after her family member.   So she has very little pension from 20years ago.
My plan was to keep topping up my pension as its tax free but understand when i draw my pension it will be taxed.   If i set up a personal pension for my wife I would be taxed when i paid into it wouldnt I?   

Dazed_and_C0nfused

You wouldn't be taxed on a pension contribution.

Your wife can probably just pay the non earners amount of £2,880/year.  Which would be grossed up to £3,600 with the basic rate tax relief the pension company would add.

Marcon

pete1975 said:

My plan was to keep topping up my pension as its tax free but understand when i draw my pension it will be taxed.   If i set up a personal pension for my wife I would be taxed when i paid into it wouldnt I?   

You wouldn't receive tax relief on contributions you make to her pension, if that's what you mean by ' you would be taxed'.

Her pension pot would benefit from tax relief at basic rate (claimed by the provider and added directly to her pot). If she has no earned income, the most she can contribute (or you can contribute on her behalf) is £2,880 net, which equates to £3,600 gross once the tax relief has been added.

Clive_Woody

First thing I would check is her state pension and make voluntary contributions for missing years where possible. You can get an online forecast for her. 

The max that can go into a pension for your wife if she's not earning is £2880 which is "topped up" by the government to £3600. Someone will be along shortly to provide the correct technical terminology for this. 

Retireinten

You want to try to pay what you can into your own pension to take yourself out of 40% tax if you're a higher rate tax payer (assuming you're not doing this already). Hopefully on the way out you will pay no more than basic rate tax at 20% after your tax free lump sum. 

Your wife is likely to have alot of unused personal allowance in the run up to SPA and a few thousand after this. It's certainly worth considering paying £2,880 a year into a pension for her as she will also be entitled to a tax free lump sum and will be able to drawdown an amount within her personal allowance each year, meaning that she pays £2,880 in and gets £3,600 out. 

This is just about being as tax efficient as you can be.  If I was to draw down £25k from my pension each year I would receive £22,500 after tax. If was to draw down £12,500 and my husband the same each year (and this was our only taxable income) we would receive £25,000 because we've made fill use of both of our tax allowances. 

xylophone

she had a great job years ago in finance but wanted to look after her family member.   So she has very little pension from 20years ago.

Does  she have a deferred defined benefit pension from this job?

Has she checked her state pension forecast?

Have you?

https://www.gov.uk/check-state-pension

pete1975

xylophone said:

she had a great job years ago in finance but wanted to look after her family member.   So she has very little pension from 20years ago.

Does  she have a deferred defined benefit pension from this job?

Has she checked her state pension forecast?

Have you?

https://www.gov.uk/check-state-pension

i will check it again,  last time I did and she had the full pension due

atush

It would be worth you paying into a pension for her, there will be BR relief ie 2880 is made up to 3600.   But paying more into yours by SS if you can afford to as well.

As she doesnt pay tax, have you looked into using part of her PA?  She can give you 1K of it per annum, if you dont pay HRT

Marcon

atush said:

It would be worth you paying into a pension for her, there will be BR relief ie 2880 is made up to 3600.   But paying more into yours by SS if you can afford to as well.

As she doesnt pay tax, have you looked into using part of her PA?  She can give you 1K of it per annum, if you dont pay HRT

If £1800 a month equates to 25% of OP's salary, that's well and truly in the higher rate tax bracket.

ukdw

If you are putting in £1800 a month and your employer is putting in presumably another £700 a month then that adds up to about £30k a year which is pretty impressive.
With growth in your investments and contributions over the next 11 years should hopefully mean you reach your £750k target quite easily and it could perhaps be more if you get good investment growth.   

Likewise is you put in another £2,880/£3,600k into a new pension for your wife then that could add up at least another £50k if it is invested well.

It looks like the £23k may be based on a 3% drawdown or annuity rate against the £750k - don't forgot though that if the £23k is in today's money then due to inflation, in 11 years time it could be worth a quite a bit less - if inflation is for example only 2% on average then £23k today would be the equivalent of about £16.6k in 11 years time.

As well as building up a pension for your wife, another way to increase the £23k/£16k available is to consider drawing a fair bit more from the pensions in the 10 or so years between age 57 and state pension age, then reduce the withdrawals once both your state pensions kick in.

Ps/ I presume your wife is projected to get a full SP due to the NI credits relating to carers allowance.

pete1975

ive checked the state pension and it says for my wife as long as she contributes another 5 years NI then she will get £175 a week

wife has:

• 28 years of full contributions
• 20 years to contribute before 5 April 2040
• 3 years when you did not contribute enough