Mr G.K. Asks:
My wife has recently returned to part time work and would like to restart her Pension. I am a Higher Rate Tax Payer whereas she is a Basic Rate Tax Payer and from my understanding it is more efficient from a tax perspective to pay in to my Pension. I have been paying in to a Pension of one type or another since I started work and my funds are worth much more than my wife’s. What would you suggest?
Peter Sharratt Answers:
As a Higher Rate Tax Payer, it will be more efficient to invest more in your Pension rather than starting one for your wife. As an example, a gross payment of £100 in to a Pension costs you £60 once all tax relief has been applied. The same gross payment in to a Pension for your wife would actually cost her £80. Put another way, you could make a gross payment of £133.34pm and the net cost would be £80pm. This is the same net payment as your wife but there is an extra £33.34pm paid in to the Pension.
Paying more in to your Pension therefore makes financial sense but where does this leave your wife? The good news is that at retirement the Pension can in fact provide an income until you both die. This gives you and her financial security at retirement (subject to the income being sufficient). Should you die prior to retirement, the Pension fund can usually be paid to her as a Tax Free Lump Sum. Please be aware in the early years the value could be low so this should not be seen as a substitute for Life Assurance. Finally, there is a risk that you could get divorced. In this instance, the value of your Pension can be included in any financial settlement and some or all of it can be paid in to your wife’s Pension via a Pension Sharing Order.
If you divorce, the Pension can be shared between you, if you Die the value can be paid to your wife and at retirement the income can continue to be paid until you have both died. Ultimately your Pension can provide for her as well. The one main downside is that at retirement the income will be taxed as your income and not your wife’s. You may find that you end up paying more tax than if you had paid in to a Pension for her and spread the income between you.
A pension is a long term investment the fund value may fluctuate and can go down. Your eventual income will depend on the size of the fund at retirement, future interest rates and tax legislation, which are subject to change.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email firstname.lastname@example.org stating Financial Services Questions in the subject heading and we will add you to our distribution list.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.