I am 57 and currently have about £300,000 in one pension pot and another final salary pension that is forecast to give me £3,000 a year.
I estimate when I retire I could have a pension of £20,000. My wife has nothing. She worked mainly part time whilst raising our children and now is the principal carer for her mother who lives nearby.
Is there any way I can give my wife half my pension pot so that we can maximise our income by utilising two tax-free income allowances?
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Splitting a pension: Can you do anything when one spouse has a retirement fund and the other has none? (Stock image)
Steve Webb replies: Whilst you cannot simply transfer money from your pension pot to one in your wife’s name, there may be things that you can do to reduce the total amount of tax that you are likely to have to pay in retirement.
Check both your state pensions
The first thing to bear in mind is that both you and your wife are likely to get a state pension, which at today’s rates could be roughly £8,300 per year.
Even if your wife has had an interrupted work history, whether because of time at home with children or her role as a carer now, she may be entitled to National Insurance credits for those periods, which means she might still manage to reach the 35 years of contributions or credits needed for a full state pension.
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You should probably both check out your state pension entitlement here and should ensure that you claim any credits that are due.
Take advantage of the marriage allowance
At the moment, the personal tax-free allowance is £11,500 per year, rising to £11,850 from 6 April 2018.
As you rightly point out, if your income is £20,000 or so, and your wife only has a state pension, then part of her tax-free allowance will be ‘unused’, whereas you are paying tax on nearly half of your income.
One scheme which you could take advantage of in future (and possibly immediately) is the ‘marriage allowance’. This is designed for couples where one partner is paying tax at the standard rate and the other is a non-taxpayer.
The non taxpayer can sign over up to 10 per cent of their unused personal allowance to the higher earner.
In your case, your wife could sign over £1,150 in unused tax allowance to you, and this would reduce your tax bill by 20 per cent of £1,150 or £230 per year.
You can also backdate claims to this allowance for several years – I wrote about this in a previous column here.
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Put money in a pension for your wife
Turning now to your pension, there is no mechanism for transferring money directly from one person’s pension pot to another’s, save in the complex case of what happens where a couple get divorced.
However, there may still be things you could do to rebalance your income and that of your wife.
Even if your wife is not earning, she is allowed to put up to £3,600 per year into a pension. She should also be able to get tax relief on these contributions (see below) so 20 per cent of the cost (£720) would be met by the government.
You and your wife may have some non-pension savings that could be used for this. Alternatively, if and when the time is right for you to draw on your £300,000 pension pot, you will be entitled to take a quarter of this money tax free.
If you wanted to, you could put some of this money each year into a pension in your wife’s name. The gov.uk website says ‘when someone else (such as your partner) pays money into your pension, you automatically get tax relief at 20 per cent if your pension provider claims it for you (relief at source)’.
If we assume a tax allowance of £11,500 for your wife, that she transfers one tenth of this to you (£1,150) and that she draws a full state pension (roughly £8,300), then she would only have just over £2,000 per year of ‘wasted’ tax allowance left.
If she can build up a pension of her own over the coming years then that will absorb some of the remainder, and the problem of ‘wasted’ tax allowance will be largely resolved.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0300 123 1047.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
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