We may marry for romantic reasons, but there are some important financial benefits for tying the knot, especially when it comes to pensions.
As we have all seen in the news recently, there is a gender gap in pay. This gap continues into retirement. On average UK men have £73,600 saved in a pension pot and women have just £24,900 – the tendency of women to take a career break to have a family may be as much the cause of this as workplace inequalities.
However, with proper planning, it is possible to make pension arrangements that leave both of you better off.
Planning the perfect retirement
Planning is essential. It is important that you discuss with your spouse or partner when you will both retire particularly if there is an age gap. Many couples prefer to retire at the same time.
Once you have decided ‘when’ the next question may well be ‘how much’? What are your retirement plans? Start by estimating an annual budget which will let you put them into practice. Calculate how much you will need to cover the bills and how much you want to have over.
You probably don’t need as much as you bring in when you are both earning. You will no longer be paying commuting costs or pension contributions and you will probably have paid off your mortgage.
Then you are ready to look at the best ways to ensure you have the pension you need, and how being married or in a civil partnership can help.
Make the most of both your personal tax allowances
Every adult has a personal allowance, which is the level of income that you can have before paying tax.
You can use this to reduce the amount of tax you pay in retirement. If only one of you has a pension and it is £20,000 a year, you will pay tax on the income over £11,500. But if you both have an annual pension of £10,000, neither will be tax deductible.
So the first point to remember is that both of you need separate pension incomes to help reduce the amount of tax you pay.
This simple truth is made a little more complicated by the fact that the marriage allowance scheme enables individuals to transfer £1,150 of their personal allowance to their spouse or civil partner. This allows a little leeway if your pension pots are of very different sizes.
Provide your partner with a pension
Obviously, it is only possible to pay into a pension if you have sufficient income. But If one of you is not working, they can have a pension that the earning spouse pays into. They can enjoy the tax benefits while you can enjoy a growing pension pot.
You can pay up to £3,600 per annum into a spouse’s pension if they are not working. This will only cost you £2,880 as they effectively reclaim the tax for you.
If a spouse is working you can pay even more into their pension. The annual limit for an individual’s pension contribution is £40,000, or their entire earnings, whichever is the lower. So if your spouse earns and you earn considerably more, you could pay £40,000 a year on their behalf.
Both of you can benefit from your maximum allowances, making this a very effective way to build your pension pots.
What about the state pension?
If you both reach state pension age on or after 6 April 2016 the full state pension is £159.55 per week. But you must have a complete record of national insurance contributions for 35 years. Women may not have a full national insurance record because of family responsibilities – but you may be able to make up contributions for missing years.
It may be best to get some help to make the most of your pension plans. At Continuum we can provide it.
The value of your pension and investments can fall as well as rise and you may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
aegon.co.uk – readiness report 2017 – April 2017
telegraph.co.uk – Average pension pot in UK: What is a good pension pot? – 21 August 2017