Paying More Into Wife's Pension

WSB

Hi All,

Just wanted to put this out there to get some opinions.

I am 53 and my wife is 48.

I currently have a pension pot of £675K and my wife has a pension pot of £14K.

This is due to me being a 40% tax payer and us taking the decision to pile monies into my pension to shelter it from the 40% tax burden.  Current total contribution to my works pension is 14% plus I also pay an additional £1500 a month in per month as AVCs.

My wife is a standard rate 20% tax payer and current total contribution to her works pension 8% per year.

So as you can see, heavily weighted on my pension, so as to currently avoid 40% tax.

However, I'm aware that when we come to retire and we draw down from the pensions for the both of us, we have this issue whereby I'll have a large pot which will be difficult to get money out without paying 40% tax, whereas my wife has the opposite.

Currently, I'm thinking that it would be nice for us to live at retirement on us both being able to draw down but remain just below the 40% tax band each.

I know it's swings and roundabouts with this but just wondering whether it's worth pumping more into her pension scheme by way of AVCs, although she'll only be saving 20% tax currently.

Of course, if in the future, she gets into the 40% tax bracket, then definitely, we'd be pumping more money into her pension to shelter it from 40% tax.

Anyway, just putting this out there for opinions, ideas etc.

Thanks in advance

Dazed_and_C0nfused

WSB said:

Hi All,

Just wanted to put this out there to get some opinions.

I am 53 and my wife is 48.

I currently have a pension pot of £675K and my wife has a pension pot of £14K.

This is due to me being a 40% tax payer and us taking the decision to pile monies into my pension to shelter it from the 40% tax burden.  Current total contribution to my works pension is 14% plus I also pay an additional £1500 a month in per month as AVCs.

My wife is a standard rate 20% tax payer and current total contribution to her works pension 8% per year.

So as you can see, heavily weighted on my pension, so as to currently avoid 40% tax.

However, I'm aware that when we come to retire and we draw down from the pensions for the both of us, we have this issue whereby I'll have a large pot which will be difficult to get money out without paying 40% tax, whereas my wife has the opposite.

Currently, I'm thinking that it would be nice for us to live at retirement on us both being able to draw down but remain just below the 40% tax band each.

I know it's swings and roundabouts with this but just wondering whether it's worth pumping more into her pension scheme by way of AVCs, although she'll only be saving 20% tax currently.

Of course, if in the future, she gets into the 40% tax bracket, then definitely, we'd be pumping more money into her pension to shelter it from 40% tax.

Anyway, just putting this out there for opinions, ideas etc.

Thanks in advance

A basic rate tax payer doesn't "save" any tax by contributing to a relief at source scheme.  They get 25% added to their pension fund.

Will she be making these contributions using the net pay method (relatively unusual for a DC pension) or will she be sacrificing some salary?

Or will if be relief at source?

Nebulous2

The tax benefits are skewed in favour of the higher rate taxpayer making the contributions, but that isn't the only consideration. 

Retiring earlier than state pension age and being a basic rate taxpayer while my wife has minimal income has annoyed me because we cannot utilise her tax allowance. Thinking about it logically - it was exactly the same when I was working and she wasn't, but it seems more significant now. 

Albermarle

I do not think it would be wise to lose out too much on your 40% tax relief, but some addition to your wife's contributions maybe turn out to be agood idea, due to the reason mentioned in the previous post.

If she retired say 7 years before her state pension was due, she ideally should have at least enough in the pot to draw out around £16.5K for that 7 years. Assuming no other taxable income this could be withdrawn tax free.

Based on current rules of course. If Personal allowances increase again at some point then that figure would be higher. Same if she retired earlier. 

uss_tish

You also need to consider what provision you have in pace should you pass before your wife? 

DT2001

When are you both planning to retire?
What is your number? - you say ideally you want to draw just below the 40% tax threshold so £50k each?
Assuming you both will get a full SP you would need a combined pot of £2m at an optimistic 4% SWR to achieve £80k gross.
Maybe you fund your pension until it is big enough at a realistic SWR to produce £40k post SPA and then look at the position. Pension rules will probably have changed and your wife but then by a higher rate tax payer.

sighup

WSB said:

....
This is due to me being a 40% tax payer and us taking the decision to pile monies into my pension to shelter it from the 40% tax burden.  Current total contribution to my works pension is 14% plus I also pay an additional £1500 a month in per month as AVCs.

My wife is a standard rate 20% tax payer and current total contribution to her works pension 8% per year.

So as you can see, heavily weighted on my pension, so as to currently avoid 40% tax.

The growth of your pension will have benefited from the higher tax relief while invested, so even if you do pay 40% on drawdown, your total pot will be larger than if you had not received the tax benefit? By thinking of it as a free loan which is being paid back on drawdown, you will still be better off. 

As for avoiding 40% tax, blending pension tax-free 25% PCLS cash + 75% taxable pension income, with tax-free ISA cash can yield what would otherwise be a 40% taxable income, but at a lower effective rate of tax. Plus, if you are open to downsizing property to release equity, this is another income stream. 

If you're not already aware of these YouTube channels, I rate them highlyfor solid content relating to Pensions and ISAs, etc., and in particular the video referenced by Chris Bourne is very helpful in understanding the mechanics of drawdown. Both Pete and Chris offer Voyant Go (not free) to help model your income/life stages, etc.

1. https://www.youtube.com/@MeaningfulMoney Pete Matthew is a Chartered Financial Planner, and has a lot of content which I think you will find to be very interesting. Pete waves his hands around a lot, but is well worth watching.
2. https://www.youtube.com/@EdmundBaileyUK Edmund Bailey, another CFP who doesn't have much content, but what there is, is very good.
3. https://www.youtube.com/@chrisbourne-taxfreeinvesti9688 Chris Bourne, a financial planner.

In summary, it sounds as though some rebalancing of pension pots would be a good idea, especially regarding the very good point made about provisions for your wife, so maybe consider a holistic approach to your combined assets in addition to pensions, so that drawing income in retirement has a number of options, rather than rely solely on pensions?

WSB

Dazed_and_C0nfused said:

WSB said:

Hi All,

Just wanted to put this out there to get some opinions.

I am 53 and my wife is 48.

I currently have a pension pot of £675K and my wife has a pension pot of £14K.

This is due to me being a 40% tax payer and us taking the decision to pile monies into my pension to shelter it from the 40% tax burden.  Current total contribution to my works pension is 14% plus I also pay an additional £1500 a month in per month as AVCs.

My wife is a standard rate 20% tax payer and current total contribution to her works pension 8% per year.

So as you can see, heavily weighted on my pension, so as to currently avoid 40% tax.

However, I'm aware that when we come to retire and we draw down from the pensions for the both of us, we have this issue whereby I'll have a large pot which will be difficult to get money out without paying 40% tax, whereas my wife has the opposite.

Currently, I'm thinking that it would be nice for us to live at retirement on us both being able to draw down but remain just below the 40% tax band each.

I know it's swings and roundabouts with this but just wondering whether it's worth pumping more into her pension scheme by way of AVCs, although she'll only be saving 20% tax currently.

Of course, if in the future, she gets into the 40% tax bracket, then definitely, we'd be pumping more money into her pension to shelter it from 40% tax.

Anyway, just putting this out there for opinions, ideas etc.

Thanks in advance

A basic rate tax payer doesn't "save" any tax by contributing to a relief at source scheme.  They get 25% added to their pension fund.

Will she be making these contributions using the net pay method (relatively unusual for a DC pension) or will she be sacrificing some salary?

Or will if be relief at source?

Dazed_and_C0nfused said:

WSB said:

Hi All,

Just wanted to put this out there to get some opinions.

I am 53 and my wife is 48.

I currently have a pension pot of £675K and my wife has a pension pot of £14K.

This is due to me being a 40% tax payer and us taking the decision to pile monies into my pension to shelter it from the 40% tax burden.  Current total contribution to my works pension is 14% plus I also pay an additional £1500 a month in per month as AVCs.

My wife is a standard rate 20% tax payer and current total contribution to her works pension 8% per year.

So as you can see, heavily weighted on my pension, so as to currently avoid 40% tax.

However, I'm aware that when we come to retire and we draw down from the pensions for the both of us, we have this issue whereby I'll have a large pot which will be difficult to get money out without paying 40% tax, whereas my wife has the opposite.

Currently, I'm thinking that it would be nice for us to live at retirement on us both being able to draw down but remain just below the 40% tax band each.

I know it's swings and roundabouts with this but just wondering whether it's worth pumping more into her pension scheme by way of AVCs, although she'll only be saving 20% tax currently.

Of course, if in the future, she gets into the 40% tax bracket, then definitely, we'd be pumping more money into her pension to shelter it from 40% tax.

Anyway, just putting this out there for opinions, ideas etc.

Thanks in advance

A basic rate tax payer doesn't "save" any tax by contributing to a relief at source scheme.  They get 25% added to their pension fund.

Will she be making these contributions using the net pay method (relatively unusual for a DC pension) or will she be sacrificing some salary?

Or will if be relief at source?

Thank you. Her employer takes it out and pays it to aviva. 

WSB

DT2001 said:

When are you both planning to retire?
What is your number? - you say ideally you want to draw just below the 40% tax threshold so £50k each?
Assuming you both will get a full SP you would need a combined pot of £2m at an optimistic 4% SWR to achieve £80k gross.
Maybe you fund your pension until it is big enough at a realistic SWR to produce £40k post SPA and then look at the position. Pension rules will probably have changed and your wife but then by a higher rate tax payer.

Let's say we both retire at state pension age. 
I'm currently 53 and she's 48.

WSB

Forgot to mention that we'll also have income from our investment property.
Gross £1100 per month