Taking a joint approach to financial planning with your partner can create new opportunities to build your wealth and meet your long-term goals together. It could also make it easier to tackle any financial challenges, and it’s likely to improve your relationship too.
Indeed, according to a study from Indiana University, couples who merge their finances are happier and have less arguments about money.
As such, you may want to combine your finances with your partner and support one another’s financial plan wherever you can.
However, there are some significant opportunities for joint wealth planning that you may not be aware of, such as contributing to your partner’s pension. According to FTAdviser, 73% of people surveyed were unaware that they could pay into their partner’s pension at all.
Yet, third-party pension contributions can be an incredibly useful financial planning tool that benefits you both.
Read on to learn how the rules about contributing to your partner’s pension work, and what some of the unexpected benefits could be.
Third-party pension contributions count towards the pension holder’s Annual Allowance of £60,000
When you pay into somebody else’s pension, the contributions are treated as if that person had paid the money in themselves.
As such, their normal Annual Allowance applies. This means they can accumulate a total of £60,000 – or £3,600 if they are not earning an income – in their pension in the 2023/2024 tax year and receive tax relief on it. This includes their own contributions, employer contributions, tax relief, and any contributions you make on their behalf.
You can contribute as much as you like to their pension in this way and, provided they do not exceed their Annual Allowance, they will receive 20% tax relief at source. If they are a higher- or additional-rate taxpayer, they may also be able to claim more tax relief through self-assessment.
Third-party pension contributions are considered gifts for Inheritance Tax purposes
Any money you pay into your partner’s pension is normally considered a gift for Inheritance Tax (IHT) purposes.
Each person has an annual exemption for gifts. In the 2023/2024 tax year, the first £3,000 you contribute to somebody else’s pension automatically falls outside of your estate when calculating IHT. Any further contributions you make may also fall outside of your estate, provided you live for seven years after making the gifts.
Additionally, regular payments into your partner’s pension may come under the “gifts from income” rules. However, to avoid an IHT charge, gifts must meet specific criteria:
- They must be regular.
- They must be paid from your income rather than your other savings.
- You must be able to afford the gift without affecting your current lifestyle.
It is also important to note that pensions are not normally subject to IHT, so paying into your partner’s pension can be an effective way to pass wealth to them tax-efficiently.
The unexpected benefits of paying into your partner’s pension
1. Help them boost their retirement savings
Even a modest increase in pension contributions can give a significant boost to the value of your partner’s pension pot.
For example, according to Creative, a 50-year-old earning £35,000 and making a 3% pension contribution would have £31,367 in their retirement pot at age 67. However, if they increased their contribution to 4%, they would have £41,823.
If they were to increase contributions earlier in life, the difference may be even more pronounced because they could benefit from compound returns on the wealth in their pension over a longer period.
You may want to consider this if one of you earns significantly more than the other. If the higher earner pays into the other’s pension, you could help ensure that you both have a healthy retirement fund later in life.
2. Use both of your Annual Allowances
If you are close to exceeding your Annual Allowance but your partner is not, you may benefit from contributing to their pension instead of your own.
Once you exceed your Annual Allowance, you no longer receive tax relief on contributions over the threshold. Your partner, on the other hand, will benefit from tax relief on contributions you make on their behalf because they count towards their Annual Allowance, not yours.
This means you can make full use of both Annual Allowances and continue building tax-efficient retirement savings as a couple.
3. Mitigate the effects of a career break
According to the latest figures from the UK government, the gender pension gap is 35%. This means that when they reach the minimum pension age of 55, women have, on average, 35% less in uncrystallised pension savings than men.
While this is a complex issue, one of the primary reasons for the gender pension gap is that women are more likely to take a career break to care for children than men. Consequently, they may miss out on valuable pension contributions and their retirement savings could suffer as a result.
It is not only new mothers that are likely to feel the effects of a career break either. There are countless reasons why somebody may take time away from work and it could make a significant difference to their retirement lifestyle.
Indeed, according to Financial Reporter, women over 55 could lose up to £2,500 a year in retirement income, while men could see a decrease of £4,680.
Fortunately, if your partner takes a career break for any reason, you can help them avoid a shortfall in their savings by making pension contributions on their behalf.
4. Maximise additional- or higher-rate tax relief
The tax relief on third-party pension contributions is calculated based on the marginal rate of Income Tax of the pension holder.
As such, if your partner is in a higher tax bracket than you, it may be beneficial to contribute to their pension instead of your own because they receive more tax relief than you.
If you pay into their pension until they have used their full Annual Allowance, you can maximise the higher- or additional-rate tax relief received.
5. Reduce the IHT your family pays
Any contributions you make to your partner’s pension may fall outside of your estate as they are considered gifts. Your partner’s pension is also not subject to IHT when they pass it on after they die.
Consequently, paying into your partner’s pension could help you both pass more of your wealth on to your family without a big IHT bill.
Get in touch
If you want to explore the potential benefits of paying into your partner’s pension, we can give you some guidance.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.