Retirement plan - non tax earning spouse

concernedpharmacist

I have just hit 60 years; I am drawing an NHS defined benefit pension of £25k.
I am still working, earning approx £40k through self employment.
Total income approx  £65k with about £14k at higher tax rate.

My wife aged 50, works for the NHS earning just £10k p.a. so not paying tax. She is contributing 5% of earnings to the NHS pension scheme. 

I do claim marriage allowance transferring £1,260 of her Personal Allowance to me.

I plan to retire in 2-3 years time.
My wife plans to retire in 5 years aged 55.
We are satisfied that we have sufficient savings/ future income to fund retirement at this age but are considering how to plan the next few years in  the most tax efficient way. 

Between us we could afford to save about £20k p.a.at present.

Following advice given on previous thread . I have started contributing £14k p.a. to a low risk stakeholder pension (not NEST) at 40% tax relief. 20% will be added to my pension pot and 20% claimed from HMRC through self-assesment.

After retirement I can draw 25% of this pension tax free and flexibly take the remainder at a 20% tax rate.

I/we are considering contributing a further £6k p.a. (approx £30k in pot over 5 years) to a new stakeholder pension in my wife's name. Even though she pays no tax I believe she can still benefit from the provider claiming 20% tax relief and adding to the pot (taking it up to £36k)

My understanding is that she can then flexibly access the accrued pot fron 55 - 60 years taking £7kish per year with zero tax as she will have no other income at this time.

Between us therefore will benefit from an additional 20% tax relief for the whole £20k contributed. This is on top of the 25% of my DC pension that I can take tax free.

Is my thinking sound?
Is this the most effective way of managing money over the relatively short period.?

xylophone

My wife aged 50, works for the NHS earning just £10k p.a. so not paying tax. She is contributing 5% of earnings to the NHS pension scheme. 

A "net pay" arrangement.

https://www.which.co.uk/news/article/pension-tax-change-to-boost-take-home-pay-for-low-earners-aUzjA0p4tqgH

She will receive tax relief on her contributions to a personal pension ("relief at source") arrangement.

Dazed_and_C0nfused

I do claim marriage allowance transferring £1,260 of her Personal Allowance to me.

I/we are considering contributing a further £6k p.a. (approx £30k in pot over 5 years) to a new stakeholder pension in my wife's name. Even though she pays no tax I believe she can still benefit from the provider claiming 20% tax relief and adding to the pot (taking it up to £36k)

You can't "claim" Marriage Allowance, it is only the person agreeing to the reduced Personal Allowance who can apply. Otherwise people could deliberately give their spouse a tax bill 😳

You've also got your sums wrong.  If your wife pays in £30k then 25% (£7,500) is added by the pension company making a fund of £37,500.  The tax relief is based on the gross contribution, 20% of £37,500 is £7,500.

Between us therefore will benefit from an additional 20% tax relief for the whole £20k contributed. This is on top of the 25% of my DC pension that I can take tax free.

I'm not sure what your "additional 20% tax relief" is referring to here as you have covered two different situations (yours and wife).

Your wife will get 20% tax relief on her contributions.  You will get 20% tax relief on your contributions.

There is no fixed additional 20% relief due to either of you.  But your contribution will increase your basic rate band by the amount of your gross contribution and your tax liability recalculated using that increased basis rate band, meaning more income is taxed at 20% and less at 40%.  It could save you another £2,800 but it is not fixed as such, it entirely depends on your overall tax position for the year. 

All of the above assumes neither of you are Scottish resident for tax purposes and annual allowance isn't an issue.

concernedpharmacist

The 5% into the NHS DB scheme is net pay.

But my proposal is to also pay £6k into a personal DC pension which would be relief at source and hopefully gain 20% tax relief even though she doesn't earn enough to pay tax.

Dazed_and_C0nfused

Whether she pays tax or not is irrelevant for "relief at source" contributions.

Basic rate tax relief will be added, just as it is for the many non earners who contribute £2,880 (net) each year.

concernedpharmacist

So it makes sense if we can afford it to prioritise our savings into  contributions into a relief at source plan for someone who will not be paying tax when she retires and draws in 5 years time?

Effectively 25% return?

Dazed_and_C0nfused

Yes, otherwise her whole (reduced) Personal Allowance would be wasted.

Remember if she keeps the fund in cash it's 25% as a one off addition but inflation will have a significant impact.

She only has has a shortish window for investing though so a slightly tricky balancing act between risk of investment losses and inflation loss.

But better than sticking it into a savings account.

concernedpharmacist

Thanks for your advice.

Yep.point 1 accepted. Of course she is choosing to transfer the marriage allowance to me. We work together on the household finance 

Point 2. Yep my mistake. 25% added to the pension contributions (I did know but forgot!).

Point3. It is the principle I am exploring. As a higher rate tax payer I should be able to benefit significantly by contributing an amount equivalent to my earnings in excess of £52kish to a stakeholder.  Is this the most effective way of saving in these circumstances?Dazed_and_C0nfused said:

I do claim marriage allowance transferring £1,260 of her Personal Allowance to me.

I/we are considering contributing a further £6k p.a. (approx £30k in pot over 5 years) to a new stakeholder pension in my wife's name. Even though she pays no tax I believe she can still benefit from the provider claiming 20% tax relief and adding to the pot (taking it up to £36k)

You can't "claim" Marriage Allowance, it is only the person agreeing to the reduced Personal Allowance who can apply. Otherwise people could deliberately give their spouse a tax bill 😳

You've also got your sums wrong.  If your wife pays in £30k then 25% (£7,500) is added by the pension company making a fund of £37,500.  The tax relief is based on the gross contribution, 20% of £37,500 is £7,500.

Between us therefore will benefit from an additional 20% tax relief for the whole £20k contributed. This is on top of the 25% of my DC pension that I can take tax free.

I'm not sure what your "additional 20% tax relief" is referring to here as you have covered two different situations (yours and wife).

Your wife will get 20% tax relief on her contributions.  You will get 20% tax relief on your contributions.

There is no fixed additional 20% relief due to either of you.  But your contribution will increase your basic rate band by the amount of your gross contribution and your tax liability recalculated using that increased basis rate band, meaning more income is taxed at 20% and less at 40%.  It could save you another £2,800 but it is not fixed as such, it entirely depends on your overall tax position for the year. 

All of the above assumes neither of you are Scottish resident for tax purposes and annual allowance isn't an issue.

Thanks for your advice.

Yep.point 1 accepted. Of course she is choosing to transfer the marriage allowance to me. We work together on the household finance 

Point 2. Yep my mistake. 25% added to the pension contributions (I did know but forgot!).

Point3. It is the principle I am exploring. As a higher rate tax payer I should be able to benefit significantly by contributing an amount equivalent to my earnings in excess of £52kish to a stakeholder.  Is this the most effective way of saving in these circumstances?

NannaH

Erm,  you will have to pay pax the marriage allowance back - you can’t have it as a higher rate tax payer.   My husband was caught out by this and had a £500 tax bill.

Dazed_and_C0nfused

NannaH said:

Erm,  you will have to pay pax the marriage allowance back - you can’t have it as a higher rate tax payer.   My husband was caught out by this and had a £500 tax bill.

But by making the extra pension contributions the op will be increasing their basic rate band, presumably with the intention of making all their income taxable at 20%.  So not a higher rate payer.

Obviously this does depend on getting the sums 100% correct as just £1 taxed at 40% would make the op ineligible for Marriage Allowance.

NannaH

If he’s aready had it as a HR tax payer though- he will have to pay it back?