How best to fund pension / protect wife

getting_better_2

Hi,

Apologies if this is either rambling or difficult to read... I've been thinking a lot about pension planning etc recently and have a few different angles on it.

This particular line of thought is mainly thinking of my wife...

Basic facts, I'm 41, currently earning a little over £100k and putting the excess into my pension in order to keep under £100k taxable earnings and in effect getting 40% tax relief on whatever goes into pension. My aim is to retire somewhere around 55 (I realise I'll not be able to draw any pension until 58), hopefully with a pension pot of c. £500k and the same again in savings/investments outside of pension. I need to do a bit of work on it but loosely aiming for something that will give me in the realms of £40k a year from retirement which hopefully (including state pension from 68) this should be enough to be in the ballpark

My wife is 46, currently not working, has effectively no personal pension pot (maybe £5k) and has around 16 years of NI contributions therefore well short of full state pension with (at least currently) no intention of returning to work

The £40k figure above is comfortable for us both to live off in retirement so as long as we are both still here, all will be well

My questions have 2 motivations behind them:

1) Can we be more tax efficient in saving / funding pensions now (predominantly thinking of £2,880 pension contribution for my wife plus any "buying" years of NI contributions)
2) If I'm not around as long as she is, can we spread the risk a little by funding her pension more and therefore her not being so reliant on my pension pot in the event of her being left alone (she is named beneficiary and I assume once it comes to drawing my pension we could do it in a way that she still benefits beyond my death but I'm guessing there are costs associated to that?)

I guess simplistically then my questions are:

a) Should we look to top up her years of NI now in order to get her on track for full state pension?
b) Should we be paying £2,880 a year into a pension in her name in order to benefit from the £720 tax relief
c) What else are we missing?

On b) my previous thinking had been to put as much into my pension as possible to benefit from 40% tax relief (or more by avoiding landing in the £100-£125k zone) rather than only 20% for her but I'm wondering if we're missing a trick by not taking advantage of her non-tax payer status (and also giving her a little more comfort that there is a building pension pot in her own name) - she will also be able to draw it out again 5 years sooner than me

Apologies again for the long post and if I'm missing useful info and thanks in advance for any responses

Albermarle

1) Can we be more tax efficient in saving / funding pensions now (predominantly thinking of £2,880 pension contribution for my wife plus any "buying" years of NI contributions)
2) If I'm not around as long as she is, can we spread the risk a little by funding her pension more and therefore her not being so reliant on my pension pot in the event of her being left alone (she is named beneficiary and I assume once it comes to drawing my pension we could do it in a way that she still benefits beyond my death but I'm guessing there are costs associated to that?)

Your thinking is generally correct .

ON point 1) the other advantage of your wife having her own pension pot is that she can utilise her personal tax allowance when withdrawing it and pay no tax . 'Wasting' one partners personal tax allowance in retirement is to be avoided where possible.

Buying extra NI years where possible is fantastic value for money . About £850 buys over £5 a week ( inflation linked ), so you  are ahead in less than 4 years. There some limits on what can be bought and it is recommended she contacts this organisation for advice.   Contact the Future Pension Centre - GOV.UK (www.gov.uk)

If she is named as beneficiary for your pension , then she will get whatever is left in the pot. If you die before 75 she can take it all tax free. 

The £40k figure above is comfortable for us both to live off in retirement so as long as we are both still here, all will be well

You are not going to starve on £40K but normally estimates of what is needed for a comfortable retirement tend to be in the £45K to £50K region .

getting_better_2

I've just partially answered my own question on wife's lack of NI contributions as she is a stay at home parent claiming child benefit (which I essentially repay through tax) - from further reading on this site, I believe she should get NI credits for the years of children being under 12 which eventually should bring her up to around 28 qualifying years and therefore just needing to gain or pay for 7 more further down the line

gm0

Protection will usefully cover many years.  So this can be left until later when protection ceases and years made up then.  However if there are childless but incomplete years within the time limit to buy them they may be cheaper to top up than waiting and the opportunity to do so disappears.  There are sadly additional rules related to managing the winners and losers of the new state pension to an acceptable level.

What years it makes sense to buy is complex

This flowchart is helpful to get ducks in a row before calling the NI line or DWP Future Pension Centre.

https://www.royallondon.com/siteassets/site-docs/media-centre/good-with-your-money-guides/topping-up-your-state-pension-guide.pdf

getting_better_2

Thank you very much for the reply Albermarle

Slightly embarrassingly, I hadn't even considered the tax allowance when drawing pensions

In very round numbers and using todays allowances, I guess we should be ensuring she is drawing a personal pension of at least £3k (£12.5k allowance less £9.5k full state pension) and possibly more prior to reaching state pension age

I think I need to read up more on drawdown pensions, I suspect a lot of my thinking is probably based on outdated thinking around annuities (hence the idea of there being a cost to buying an annuity which can transfer on death) - I guess this is an unlikely route to ultimately take - good to know there is an option that full remaining value can transfer

Interesting too on the £45-£50k figure...admittedly my £40k number was after tax and (I assume) the £45-50 is pretax? Which would put me in the ballpark. To be honest I need to work on this a bit - clearly I haven't considered the tax implications when drawing pension very well!

Thanks again for the response - so much to think about - the more look into things, the more I realise how little I know...hopefully by looking now I'm in time to put right anything that needs sorted 

MallyGirl

getting_better_2 said:

I've just partially answered my own question on wife's lack of NI contributions as she is a stay at home parent claiming child benefit (which I essentially repay through tax) - from further reading on this site, I believe she should get NI credits for the years of children being under 12 which eventually should bring her up to around 28 qualifying years and therefore just needing to gain or pay for 7 more further down the line

If this is based on a belief that you need 35 years then that is not right. We are in a transition period where the rules have changed so the calculation is more complicated. Best to check the gov forecast for what she needs and how far she can improve matters

getting_better_2

Thank gm0...another very interesting read

Thanks too MallyGirl - it is indeed based on a belief that 35years will be required - sounds like it's time for her to get a gov gateway login and find out the exact status

Marcon

What's the position on life insurance? Do you have any (especially if you have children)?

Albermarle

getting_better_2 said:

Thank you very much for the reply Albermarle

Slightly embarrassingly, I hadn't even considered the tax allowance when drawing pensions

In very round numbers and using todays allowances, I guess we should be ensuring she is drawing a personal pension of at least £3k (£12.5k allowance less £9.5k full state pension) and possibly more prior to reaching state pension age
Yes that would be the general idea.

I think I need to read up more on drawdown pensions, I suspect a lot of my thinking is probably based on outdated thinking around annuities (hence the idea of there being a cost to buying an annuity which can transfer on death) - I guess this is an unlikely route to ultimately take - good to know there is an option that full remaining value can transfer
There is always a lot of debate on this forum about drawdown, annuities etc  Annuities have been out of favour but can still play a role . It is does not have to be 100% one way or the other . If you do not have the luxury of a DB/final salary pension then some guaranteed income can be a good idea.

Interesting too on the £45-£50k figure...admittedly my £40k number was after tax and (I assume) the £45-50 is pretax? Which would put me in the ballpark. To be honest I need to work on this a bit - clearly I haven't considered the tax implications when drawing pension very well!

Thanks again for the response - so much to think about - the more look into things, the more I realise how little I know...hopefully by looking now I'm in time to put right anything that needs sorted . Many of us have come to this forum with similar questions in the past  and have since learned quite a lot. 

nteresting too on the £45-£50k figure...admittedly my £40k number was after tax and (I assume) the £45-50 is pretax?

No it is after tax , but everybody's spending habits are different of course . We have forum members happily living of £20K pa as a couple . On the other hand a real luxury retirement could cost says £250K pa . Those private jets don't come cheap !

This survey is 3 years out of date , so need to add on some inflation .
Retirement living standards | Loughborough University (lboro.ac.uk)

MX5huggy

I don’t see why you are looking to have £500k pension and £500k savings. With the tax advantages of pension. 

You need some money to get from 55 to 58, say £150k. But if you had £800k pension at 58 you could take out £200k tax free. 

I would be looking to save in pension up to the Annual Allowance £40k Each year until you we’re looking like crashing into the Life Time Allowance £1m and a bit.

getting_better_2

Thanks again for the further responses...

Life insurance - good question - probably another area I've realistically neglected...there are a couple of minor bits from death in service and limited cover in health insurance policies but it's not covered well enough - another to add to the list to sort

On the £500k pension / £500k other - it's probably a bit flexible and again needs proper structure put to it and ultimately ought to end up more heavily weighted to pension however the main reason for being more weighted toward savings than normal is that a decent chunk of it is likely to come via work related share schemes (growth shares and EMI) which will be taxed under capital gains rather than income tax

Actually, as I type the last sentence, it's pretty obvious even with that, I really ought to be looking to get close to £40k a year for the next 15 years going to pension, the "share" income (growth shares and EMI) can pay for living costs in the meantime whilst maxing out pension contributions

Ever more food for thought!!