Pension tips for couples

• Pay into their partner’s pension: A higher earning partner approaching the Lifetime Allowance or Annual Allowance could pay additional contributions into their partner’s pension. The contributions will attract tax relief and the couple will be able to draw a tax-free combined income of more than £30,000. (See example).
• Don’t forget the death benefits and inheritance tax benefits of pensions: Pensions won’t normally form part of the estate for inheritance tax purposes and on death before age 75, they can usually be paid out tax free (on death after 75, they are taxed as the beneficiary’s income). It can make sense to discuss when and how to access a pensions and if it would be better to spend any other savings first.
• Avoid unnecessary large withdrawals from a pension fund: Couples should consider how much money they need to withdraw from their pension funds. Drawing too much too quickly can lead to large tax bills
• Make sure your partner knows who to contact about your pensions if you die: You may have carefully arranged all your finances so that they can be passed to your loved ones in the most tax efficient way possible. However, if your partner hasn’t been part of the conversation, they may make uninformed decisions. It’s worth remembering that any adviser/client relationship you have ends on death. Data protection rules mean your financial adviser won’t necessarily know what is happening. This can lead to irreversible and costly mistakes being made.

It is possible for a couple to have a combined income of £33,520pa without paying tax.

Here’s how it works:

Richard 62 and Monica 60 are looking to retire. They are mortgage free and have no immediate need for a lump sum to pay off debts, but do require a joint income of £33,000 pa (after tax) to live off. They each have a pension pot valued at circa £400,000 and their adviser recommends that they each use part of their tax free cash allowance to provide the required income, as follows:

TFC: Tax-free cash. DD: Drawdown 

The advantages of this approach are:

• No income tax is payable, since all the drawdown income falls within their tax free personal allowances of £12,570 (for 2021/22). This means less pension savings are needed to provide the required income. Note that although no tax is due, they are likely to find that tax is deducted (at least on their first withdrawal). They will therefore need to complete form P55 to reclaim this.
• The minimum amount necessary to produce the income is drawn from the pension. This allows the remaining tax free cash entitlements to remain outside of each person’s estate for inheritance tax purposes.
• The remaining pension funds can continue to grow within the tax advantaged pension wrapper, including their remaining tax free cash entitlements.
• Current Government policy is that the tax free personal allowance will be frozen until 6 April 2026. After this time, Richard and Monica will be able to increase the income drawn each year in line with future rises without incurring an income tax liability or needing to use a higher proportion of tax free cash.
• The solution is particularly relevant to helping couples planning to retire ahead of any State Pension starting to pay out. When State Pension is drawn this will also need to be taken into account as a source of taxable income.