Maximizing Pension Strategy Mid 30s, one salary for the household

Tashitalksmoney

Thank you all. I agree, balancing between different life goals is definitely a personal choice and we will be reassessing it regularly but we just wanted to make sure that at this stage we haven't missed the obvious financial tool, leverage or a red flag. 

Nebulous2

We've been a one-income household for most of our working lives. Now early retired, I have a pension and after struggling to adjust to retirement took a part-time job. This means most of the income, pension and employment, sits with me. I'm paying tax on part of my pension and everything I earn, while my wife has a tax allowance which isn't used - other than the married person's transfer of allowance to me. 

We are now paying £2880 per year into a SIPP for her, but it would be extremely helpful if our income wasn't so unbalanced and we could use both personal allowances. It isn't for a short period either, we are looking at 8 years plus of that. 

That isn't much different from the position while I was working and her personal allowance wasn't used, but on a reduced income I'm more acutely aware of it, especially when looking at the tax deducted on my relatively modest part-time earnings. 

Tashitalksmoney

MallyGirl said:

Whilst you get 40% relief on pension contributions you will be paying 20% on at least some of it on the way back out. Your wife (like any low earner) can withdraw about £16,666 pa from a pension in retirement and pay no tax so it would be worth getting some in a pot for her. As a non earner I would definitely start doing the £3,600 per year gross contributions that she is allowed to do.

Thanks MallyGirl. One thing I am struggling to get complete grip of is the 16,666 tax free vs 12,570 annual allowance. Does that mean that anybody retiring can withdraw 16,666 tax free per year (so 33,333 for a couple)? I thought the current annual allowance was fixed at 12,570 per person. 

Tashitalksmoney

Nebulous2 said:

We've been a one-income household for most of our working lives. Now early retired, I have a pension and after struggling to adjust to retirement took a part-time job. This means most of the income, pension and employment, sits with me. I'm paying tax on part of my pension and everything I earn, while my wife has a tax allowance which isn't used - other than the married person's transfer of allowance to me. 

We are now paying £2880 per year into a SIPP for her, but it would be extremely helpful if our income wasn't so unbalanced and we could use both personal allowances. It isn't for a short period either, we are looking at 8 years plus of that. 

That isn't much different from the position while I was working and her personal allowance wasn't used, but on a reduced income I'm more acutely aware of it, especially when looking at the tax deducted on my relatively modest part-time earnings. 

Thank you Nebulous. Very helpful to get a real life example, and does encourage us to start saving in a separate pension pot for my wife.

Unlike the UK, some of our neighbours in Europe do have a household based taxation (E.g. France) which is a great benefit for large families and single income households as total tax is calculated based on the number of people in the HH. But I guess that’s another subject for another time 😎

NoMore

The £16666 (its actually £16760) refers to the Personal Tax allowance plus 25% tax free cash. So if you have available tax free cash to take from your pension and no other income you can get £16760 out tax free every year until the tax free cash from the pension runs out.

16760 * 25% = 4190
12570 (Personal Allowance) + 4190 (tax free cash) = 16760

Dazed_and_C0nfused

Tashitalksmoney said:

MallyGirl said:

Whilst you get 40% relief on pension contributions you will be paying 20% on at least some of it on the way back out. Your wife (like any low earner) can withdraw about £16,666 pa from a pension in retirement and pay no tax so it would be worth getting some in a pot for her. As a non earner I would definitely start doing the £3,600 per year gross contributions that she is allowed to do.

Thanks MallyGirl. One thing I am struggling to get complete grip of is the 16,666 tax free vs 12,570 annual allowance. Does that mean that anybody retiring can withdraw 16,666 tax free per year (so 33,333 for a couple)? I thought the current annual allowance was fixed at 12,570 per person. 

It's because the £16,760 (not £16,666) can be a mix of tax free and taxable income.

If you take the 25% TFLS as part of each payment rather than upfront that means £16,760 is made up of,

£4,190 TFLS

£12,570 taxable income which would be covered by Personal Allowance if there is no other taxable income 

For someone who has applied for Marriage Allowance the figure would be £15,080.

£3,770 TFLS

£11,310 taxable income

MallyGirl

sorry for confusion - that is why I said about £16,666 as I didn't have the precise figure to hand.

Qyburn

Tashitalksmoney said:

 My wife does not have any pension

Will she get State Pension? I'm thinking of tax because we may soon reach a point where the State Pension uses up all the Personal Allowance. At that stage, for tax, it doesn't matter drawing solely from your SIPP.  That's where we are ourselves, the wife's pension is much smaller than mine but only needs to cover until her SP kicks in.

(All assuming your retirement income doesn't put either into higher rate tax)

Tashitalksmoney

Qyburn said:

Tashitalksmoney said:

 My wife does not have any pension

Will she get State Pension?

We hope that she would be entitled to at least some of the State Pension (that is if it still exists in 20 years.) The goal for claiming Child Benefits was mainly to get her some NI years i.e. 18 years so half of of the 35 years required. 

Dazed_and_C0nfused

Tashitalksmoney said:

Qyburn said:

Tashitalksmoney said:

 My wife does not have any pension

Will she get State Pension?

We hope that she would be entitled to at least some of the State Pension (that is if it still exists in 20 years.) The goal for claiming Child Benefits was mainly to get her some NI years i.e. 18 years so half of of the 35 years required. 

With two kids quite close together in age she will be pushing it to get 18 years.

https://www.gov.uk/government/publications/national-insurance-credits-for-parents-and-carers-cf411a