Taking money from my pension to pay into spouses pension?

thebands

Apologies if this has been covered elsewhere but I couldn't find a recent definitive answer.

I have a pension pot > £100k plus other income. My spouse has a small Defined Benefit pension, let's say £2k per year.  I understand that by taking the DB pension it triggers their Money Purchase Annual Allowance (MPAA) limiting what can still be paid into a pension each year. The MPAA is currently £10k

So, if I withdrew £12k from my own pension pot then 25% is tax free £3k, I pay marginal tax at 20% on the remaining £9k leaving me with £7.2k. Total after tax (£3k+£7.2k) = £10.2k.
If I then pay £10k of that money  into a private pension for my spouse (using their MPAA) they will receive tax relief at 25% making it £12.5k.

They can then withdraw the £12.5k from their pot, again 25% tax free £3.125k, leaving £9.375k.
Because their only other current income is the £2k then their total taxable income is £11.375k against a personal tax allowance of £12.5k meaning they actually pay zero tax.

Effectively I have moved £12k from my pension, £10.2k after tax, turned it into £12.5k in my spouses pension completey tax free. Net gain between us £2,300. I can do this every year providing that my spouses total income stays under the personal tax allowance.

Apologies for all the numbers but is my understanding correct?

Dazed_and_C0nfused

I have a pension pot > £100k plus other income. My spouse has a small Defined Benefit pension, let's say £2k per year. I understand that by taking the DB pension it triggers their Money Purchase Annual Allowance (MPAA) limiting what can still be paid into a pension each year. The MPAA is currently £10k

Your understanding is completely wrong. 

Firstly it's accessing the taxable part of a DC pot that triggers MPAA (unless it's just to buy an annuity).

If I then pay £10k of that money into a private pension for my spouse (using their MPAA) they will receive tax relief at 25% making it £12.5k.

No.  £12.5k is more than £10k😳. If MPAA was a factor then you would add £8k which becomes £10k.  

Because their only other current income is the £2k 

But most importantly why do you think non earners limit of £3,600 isn't relevant?

My spouse
Because their only other current income is the £2k then their total taxable income is £11.375k against a personal tax allowance of £12.5k

The pension is still an option (limited to £3,600 gross) but getting your spouse to look at applying for Marriage Allowance would be a good move.

It seems to me you can get a £972 tax saving/benefit between you until she reaches State Pension age, just in a slightly different way.

xylophone

Are you and your wife under state pension age?

 If so, have you each obtained  a state pension forecast?

Your wife has no taxable income at all?

She is of an age to be able to access her DB pension? 

Taking her DB pension will not trigger MPAA but in any case, where a person has income under £3,600 (gross) a year, tax relief on a pension contribution is limited.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

She can make a net contribution of up to £2880 (net) to a personal pension and the provider will claim tax relief of up to £720 and add it to her pot.

Re Marriage Allowance

https://www.litrg.org.uk/tax-nic/income-tax/tax-allowances/marriage-allowance-transferable-tax-allowance

thebands

Thanks for the replies.

Both of us are looking for early retirement, I have a decent pot and we can both take early retirement from our DB pensions.
I'm also looking to create a small pension pot for her by opening a private pension and paying in up to the limit of this years and next years earnings for her so she will have the DB income plus a small pot to access as well.

I had read that anyone can continue to pay up to £10k after starting to take a pension but as pointed out it seems this is restricted by the £3.6k non earnings limit which clearly I hadn't understood. More reading required.

I will be taking financial advice but wanted to get a decent idea of the options first.
So many thanks for helping.

Dazed_and_C0nfused

thebands said:

Thanks for the replies.

Both of us are looking for early retirement, I have a decent pot and we can both take early retirement from our DB pensions.
I'm also looking to create a small pension pot for her by opening a private pension and paying in up to the limit of this years and next years earnings for her so she will have the DB income plus a small pot to access as well.

I had read that anyone can continue to pay up to £10k after starting to take a pension but as pointed out it seems this is restricted by the £3.6k non earnings limit which clearly I hadn't understood. More reading required.

I will be taking financial advice but wanted to get a decent idea of the options first.
So many thanks for helping.

Nothing in your original post suggested your spouse was working/had earnings for pension contribution purposes.

Perhaps you could clarify exactly what the correct position is as pension contributions usually work a per tax year basis so not earning today doesn't necessarily limit her to £3,600 (gross).

If she is, or has been, working was this just accusing the DB pension or was she in a DC pension scheme as well?

thebands

At the moment she is earning but planning to give up next year. Currently she only has the work DB scheme but we have savings which will effectively allow her to save all her wages between now and retirement in a new private pension scheme, so boosting by the 25% tax relief. She will then have the DB pension and also draw down from the private scheme between retirement and when her state pension kicks in. Her total pensionable income will be below personal tax thresholds until the state pension starts.

Dazed_and_C0nfused

thebands said:

At the moment she is earning but planning to give up next year. Currently she only has the work DB scheme but we have savings which will effectively allow her to save all her wages between now and retirement in a new private pension scheme, so boosting by the 25% tax relief. She will then have the DB pension and also draw down from the private scheme between retirement and when her state pension kicks in. Her total pensionable income will be below personal tax thresholds until the state pension starts.

No, she can't do that.

She would only be able to save 80% as the basic rate relief would take the gross contribution to 100% of her earnings.

thebands

Dazed_and_C0nfused said:

thebands said:

At the moment she is earning but planning to give up next year. Currently she only has the work DB scheme but we have savings which will effectively allow her to save all her wages between now and retirement in a new private pension scheme, so boosting by the 25% tax relief. She will then have the DB pension and also draw down from the private scheme between retirement and when her state pension kicks in. Her total pensionable income will be below personal tax thresholds until the state pension starts.

No, she can't do that.

She would only be able to save 80% as the basic rate relief would take the gross contribution to 100% of her earnings.

But could she not then apply the carry forward rule?

for example:

21/22 Gross pay £15k, DB pension contributions made £2k; carry forward allowance £13k
22/23 Gross pay £15k, DB pension contributions made £2k; carry forward allowance £26k
23/24 Gross pay £15k, DB pension contributions made £2k; pay £13k into pension and claim 25% relief at source

NB thanks for your patience with me...

Dazed_and_C0nfused

thebands said:

Dazed_and_C0nfused said:

thebands said:

At the moment she is earning but planning to give up next year. Currently she only has the work DB scheme but we have savings which will effectively allow her to save all her wages between now and retirement in a new private pension scheme, so boosting by the 25% tax relief. She will then have the DB pension and also draw down from the private scheme between retirement and when her state pension kicks in. Her total pensionable income will be below personal tax thresholds until the state pension starts.

No, she can't do that.

She would only be able to save 80% as the basic rate relief would take the gross contribution to 100% of her earnings.

But could she not then apply the carry forward rule?

for example:

21/22 Gross pay £15k, DB pension contributions made £2k; carry forward allowance £13k
22/23 Gross pay £15k, DB pension contributions made £2k; carry forward allowance £26k
23/24 Gross pay £15k, DB pension contributions made £2k; pay £13k into pension and claim 25% relief at source

NB thanks for your patience with me...

She can only carry forward unused annual allowance if she has already used this years annual allowance.

Given that is £60k it doesn't seem relevant here.  Her DB AA will depend on her Pension Input Amount (a calculation linked to the increase in value of her DB pension), not the actual DB contributions but even so I cannot see carry forward being relevant to her.

I would suggest you focus on making contributions looking at her tax relief limit.

If her 2023-24 P60 is going to show taxable earnings of £13k then she cannot add £13k and get 25% added.

You might find it easier to start with the gross allowable contribution and work back to what she needs to hand over to achieve that.

xylophone

Have you both obtained state pension forecasts?

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

What is shown at estimate to 5/4/23?

With regard to your wife's current position, is her contribution to her DB pension taken from her salary before tax is deducted? ("Net pay" ).

This means that the contribution has been made gross.

Thus, if her salary is £15000 a year and she has contributed £1000 a year to the DB pension, she can make a net contribution of up to

£11,200 to a SIPP - the pension provider will claim tax relief of up to £2,800 and add it to her pot. ("Relief at source").

See https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions

See also

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pension-contributions-qa

thebands

xylophone said:

Have you both obtained state pension forecasts?

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

What is shown at estimate to 5/4/23?

With regard to your wife's current position, is her contribution to her DB pension taken from her salary before tax is deducted? ("Net pay" ).

This means that the contribution has been made gross.

Thus, if her salary is £15000 a year and she has contributed £1000 a year to the DB pension, she can make a net contribution of up to

£11,200 to a SIPP - the pension provider will claim tax relief of up to £2,800 and add it to her pot. ("Relief at source").

See https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions

See also

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pension-contributions-qa

Thank you, that makes it clearer (I think). So assuming the figures you have used the max that can be contributed to the private pension is £14k made up of her capital contribution plus the tax relief, but together never exceeding the total earnings.

I think my confusion has stemmed from the HMRC web pages which states "Your private pension contributions are tax-free up to certain limits.", "You can get tax relief on private pension contributions worth up to 100% of your annual earnings." and "your pension provider claims tax relief from the government at the basic 20% rate and adds it to your pension pot (‘relief at source’)". 

In my simpleton view 100% of annual earnings are £14k and therefore if I contribute £14k to my pension then tax relief is given on £14k, but apparently not. Poor wording on HMRC's website?

Dazed_and_C0nfused said

She can only carry forward unused annual allowance if she has already used this years allowance.

I had (again wrongly) assumed that her annual allowance was her total earnings because you can never pay more than your total earnings into a pension, and therefore if she paid her maximum earnings into a pension scheme then she would have used her "allowance".  

Seems it's not really an allowance it's a limit. The only persons able to exploit the carry forwards rule would be those earning significant wages in the first place (more than £40k/£60k) in order to be able to use the full £40k/£60k allowance (limit).

A low wage earner who didn't contribute fully to a pension in previous years cannot catch-up but a high wage earner can use carry forwards. Guess the little guy/gals who need the money the most are the ones the rules don't cater for (surprise).

Once  again, thanks for the help. Much appreciated.