How couples who save together can max out their pensions

Couples who take a joint approach to pension saving can end up far better off in retirement, though there are some snags – particularly regarding tax. 

You should concentrate on maxing your own pension before trying to boost your partner’s, and there are circumstances where it makes financial sense to focus on the higher earner’s pension, say experts.

We round up tips on taking full advantage of pensions as a couple, to gain the benefit of all the perks available, for example if one partner is doing unpaid caring for children rather than in paid employment.

You might also want to ensure you both get the most out of higher matched pension contributions from an employer.

This is free money – plus extra tax relief from the Government on top – you won’t receive in your pension otherwise. But take careful note of the caveats below on tax relief.

‘Don’t rely on one partner’s pension savings, even if only one partner is working,’ says Ray Black, managing director of chartered financial planning firm Money Minder.

‘Building savings for retirement in both partners’ names rather than just one provides for a more tax efficient joint income in retirement.

‘If one partner in the relationship is not working, for example a stay at home parent looking after younger children, it’s possible to pay up to £240 per month net in to a pension plan for the non-working partner and obtain £60 per month (a 25 per cent uplift on what is being saved in to the plan each month) via the generous tax relief that is added on top of your own contribution that is available right up until age 75.’

Alistair McQueen, head of savings and retirement at Aviva, says: ‘Paying into someone else’s pension is very possible, and can carry significant attractions.

‘It could boost the long-term financial wellbeing of the other and can be a powerful means of increasing your combined pension tax benefits.

‘However, contributing to another’s pension before your own financial wellbeing has been sorted could be counter-productive, if it means a shortfall in your own financial resilience later in life.

‘And it needs to be recognised that the relationship that encourages contributions into another’s pension in the first place may not be the relationship that exists when it comes to accessing any pension savings.’

What do you need to consider before boosting a partner’s pension? 

1. Your pension schemes

‘Under current rules, couples are theoretically able to contribute towards each other’s workplace pensions up to the amount each person earns per year or £3,600 per year if they are not currently earning,’ says Dawn Mealing, head of advice policy and development at Fidelity International.

‘This can be beneficial in a number of circumstances – for example if one of you is currently off work looking after children, or if one person is going to use up their annual allowance for the year.

‘However, in reality, contributions may be restricted by the scheme administrator, in other words the pension provider or your employer.’

Mealing says that you need to find out what sort of pension you have and what flexibility your employer offers when it comes to paying into it.

This is because if it is a ‘net pay’ scheme, your employer or the scheme may not be able to accept contributions except through payroll deduction, she explains.

Meanwhile the options might be different if it is a ‘relief at source’ scheme or if your employer makes payments directly into a private pension or self-invested personal pension (Sipp) for you.

McQueen notes that people with a pension that uses relief at source – all personal pensions and some master trusts, which manage centralised funds for several employers at once – can pay in or have paid in by a third party up to £3,600 gross (£2,880 net) and get tax relief regardless of how much they earn.

This means a partner of someone not working could pay £2,880 into a non-working partner’s relief at source pension and see £3,600 invested, he says.

But he reiterates the point above that workplace pensions which take contributions directly from an individual’s payroll will not accept them from the bank account of an employee or from anyone else’s account.

‘Making contributions into the workplace pension of another may not be as direct or as simple as you may want. The conditions associated with different workplace pensions need to be understood when contributions are being considered.’

2. Maxing out your own pension 

‘Couples should look to maximise their pots individually as a priority, and then only look to contribute to each other’s if it is tax efficient,’ says Mealing.

And McQueen says: ‘For the majority, it makes sense to focus first on maximising your own pension provision, from which you and others can benefit in later life.

‘For those who have already maximised their own pension provision, supporting the pension provision of another is worth good consideration, often with the support of a financial adviser.’

3. Tax relief

Pension tax relief allows everyone to save for retirement out of untaxed income. You receive rebates, effectively free cash from the Government paid into your pension, based on your income tax rate of 20 per cent, 40 per cent or 45 per cent.

How much tax relief each partner can receive needs to be given careful thought before you contribute extra into a pension.

McQueen explains: ‘If one partner has already maximised their own pension tax benefits, by maximising their annual allowance or having reached the lifetime allowance, contributing to another’s pension would be a means of accessing the other’s tax benefits, and thereby increasing the combined pension tax benefits.

‘In simple terms, if you are already contributing the annual maximum of £40,000 into your own pension, contributing to another’s pension could increase this annual contribution by up to another £40,000, taking the total annual pension contribution to a total of up to £80,000.’

But he cautions: ‘The tax benefits associated with each pension are dependent upon the income of the owner of that pension.

‘You may be a higher-rate taxpayer, and will therefore benefit from higher-rate pension tax relief against any contributions you make into your own pension.

‘If, however, the other person into whose pension you are saving is a basic rate tax payer, or pays no income tax whatsoever, their pension will only benefit from basic rates of pension tax relief.

‘The possibly different tax treatments of different pensions need to be considered and understood before acting.’

McQueen offers the example of some who is a higher rate tax payer, and pays into a basic rate taxpayer’s pension – this means they only get basic rate tax relief added.

Investing £40,000 into a pension will cost a couple £24,000 if they pay into the higher rate tax payer’s pension. However, if they pay £24,000 into the basic rate tax payer’s pension, they will only get £30,000 invested.

‘From a financial perspective it makes more sense to pay into the higher rate tax payer’s pension,’ says McQueen. ‘If they are both basic rate tax payers then there is no difference in cost between paying into one pension versus another, so one person making a payment into the other’s plan is fine.’

Mealing stresses the importance of the above if one of you is a higher earner, because if so that partner will not receive the higher tax relief by contributing to pension of someone only paying basic rate tax.

‘In this scenario, it may be worth speaking to a financial adviser to find out the best ways for both parties to use their allowances,’ she says.

Ray Black: Building savings for retirement in both partners’ names rather than just one provides for a more tax efficient joint income in retirement

Meanwhile, Black says keep in mind that each partner benefits from the lifetime allowance, the maximum amount of pension savings they are able to accrue up to age 75, which is £1,073,100 in the tax year 2022/23.

‘Building pension savings over time that when the income is paid will be shared between the partners means that the income tax liability on that income will also be shared.

‘For that reason, saving money for retirement in both partners’ names rather than being reliant on one partner’s income in retirement is a really good idea.’

4. Ownership

‘Any contributions into another’s pension will be owned by that other person,’ says McQueen. ‘Without their own pension savings, this other person will be dependent upon others for their income in retirement.

‘By contributing to the other’s pension, you are boosting their self-reliance and independence in later life.’

But he goes on: ‘Regardless of who may make contributions to a pension, it is the owner of the pension – the one who’s name is on the policy – who will have control over if, how and when the money is accessed.

‘Plans for access that are set at the time of making the contributions may change over time if the nature of the partnership changes over time. For example, if the partners separate or get divorced. This separation of ownership needs to be understood when contributions are being made.

‘Other than on divorce or death it’s not possible to transfer a pension pot from one partner to another.’ 

Mealing says: ‘The owner of the scheme, whoever’s pension it is, will always hold the rights in terms of any big decisions to do with the pension, so think carefully before you put your money in with theirs.’

‘Some of the decisions you won’t have a say on include who the beneficiaries should be, how much risk they want to take on and ultimately when to make drawdowns.’

Alistair McQueen: Contributing to another’s pension before your own financial wellbeing has been sorted could be counter-productive, if it means a shortfall in your own financial resilience later in life

5. Age

You cannot access a workplace defined contribution or private invested pension before the age of 55, and this will rise to 57 in 2028.

With final salary pensions, it depends on the rules of the scheme, so you you will have to check.

It is therefore sensible to plan ahead together on the basis of when each partner can start drawing on their pensions.

McQueen says: ‘It is the age of the owner of the pension that matters, not the contributor to the pension.

‘The contributor may be 55, but the owner may be younger. It is the owner’s age that matters. The limitations in accessing pensions need to be understood before making contributions.’

6. State pension

Like a traditional final salary pension, the state pension provides a guaranteed income until you die, so it is worth both partners maximising what they get.

The state pension is currently worth £185.15 a week or around £9,600 a year if you retired since April 2016 and qualify for the full rate. 

But it could soar to nearly £10,900 a year if the Bank of England is right about inflation hitting 13 per cent, and the next Tory Chancellor honours the triple lock pledge and increases payouts in line with this rate.

That increase would remain built in for future generations when they reach state pension age.

You can fill gaps in unpaid or underpaid National Insurance in previous years, and make voluntary top-ups to buy extra qualifying years, if one partner doesn’t have the 35 years of National Insurance contributions to get the full amount.

You might also be able to earn credits if you are a parent or grandparent looking after children, or are a carer or are unemployed.

Black says: ‘For couples with younger children who are able to claim child benefit payments, NI credits will count towards the 35 years of contributions that are currently needed in order to receive a full state pension.

‘Credits are only awarded to the individual whose name the child benefit is in and they are only available until your youngest child is 12.

Dawn Mealing: You need to find out what sort of pension you have and what flexibility your employer offers when it comes to paying into it

‘However, this is a great help towards the level of state pension that individual will receive and applies even if that person is not earning.

‘As long as the child benefit is paid to the correct individual, they are added to your National Insurance record automatically.’

If the ‘wrong’ parent claimed child benefit you can swap the credits to the other partner, and you can also transfer credits to a grandparent looking after children if you don’t need them because you are paying NI anyway.

7. Divorce

‘Unfortunately, not all relationships last forever,’ says Black. ‘If you are paying into your partner’s pension plan and the relationship breaks down, it may be difficult to do anything else but write that money off.

‘If you are married, regardless of who paid the money into which pension plans, they are often taken into account on divorce.

‘There are options available to divorcing couples that including sharing all of the accrued values, offsetting pension values against other assets and legal promises to pay an income or capital to either or both of the partners divorcing at a later date.

‘However, these options can be complicated and difficult to work through for both the divorcing couple and their legal advisers. In many cases, specialist pensions advice will be required to ensure that both partners are treated fairly.’

Black adds that in his experience, couples who discuss their pension plans amicably on divorce are much more likely to achieve a good outcome for all involved.

‘This could actually be relevant to not just the divorcing couple. With pensions having become multi-generational planning tools in recent years, the decisions made about pensions in a divorce can potentially affect the couple’s children and even there grandchildren.’

8. Inheritance

‘Pension savings do not form part of your legal estate, so are not subject to the same inheritance tax laws as other assets,’ says McQueen.

‘For many, saving in a pension is therefore an efficient and legitimate way of limiting inheritance tax liabilities.

‘By contributing into another’s pension, in addition to your own, you are able to shelter more of your wealth from inheritance tax.’

Black says: On death, investment based pension plans can be passed on to partners, (or someone else, that person doesn’t even need to be related) very tax efficiently.

‘If the deceased partner died after the age of 75, income tax may be payable on capital and regular income payments. However, income tax is only payable on the amount withdrawn in each tax years and dependent on the recipient’s individual income tax rate.

‘Even better, if the deceased partner died before reaching age 75, under the current rules, the surviving partner (or someone else) can move the deceased persons pension plan in to a plan called a ‘successors” pension plan and draw income and capital out without incurring an income tax liability.’

Black says money held in a pension doesn’t need to be left to a partner, but can go to children, grandchildren, great grandchildren, a best friend, a charity, or even your next door neighbour.

But he stresses the importance of completing a ‘nomination of beneficiaries’ form to let your pension provider know to whom you would like the pension money paid.