The Organisation for Economic Co-operation and Development recently warned the UK government needs to take “significant action” to stabilise public finances.
This stark assessment has reignited concerns about the future of pensions and retirement planning for Brits.
While pension reform has long been on the agenda – with ongoing discussions about one day removing the triple lock and implementing other changes – many are already worried about their financial security in old age.
One topic that’s rarely discussed, however, is how contributing to a partner’s pension can help safeguard theirs or their family’s future when experiencing a loss in earnings.
This approach not only helps to bridge the retirement savings gap but also offers significant tax advantages and long-term financial security for the family unit.
Bridging the pension gap
A recent study from The House of Commons Library, which measured the gender pension gap using 2018-2020 data, revealed women have 35% less private pension wealth than men. This substantial disparity is often due to career breaks for childcare or reduced earnings throughout their working lives.
By contributing to a partner’s pension during periods of lower income, couples can ensure a more balanced and secure retirement for both parties.
Tax efficiency at its best
One of the most compelling reasons for a client to pay into a partner’s pension is the potential for tax relief.
If one partner is a basic-rate taxpayer, the contributions will receive basic-rate tax relief of 20%. However, if the other is a higher-rate taxpayer, contributing to their own pension would attract higher rate tax relief of 40%.
This tax efficiency can significantly boost the overall value of a family’s retirement savings, making it an attractive option for couples with differing tax rates. Furthermore, building up pension savings in both partners’ names can provide financial flexibility and security in retirement.
Maximising annual allowances
For couples where one partner has reached their annual pension contribution limit (currently £60,000 or 100% of earnings, whichever is lower), paying into a spouse’s pension allows for continued tax-efficient saving.
This strategy can be particularly beneficial for high earners affected by the tapered annual allowance.
Considerations and caveats
While the benefits of contributing to a partner’s pension are clear, couples should be aware of potential pitfalls.
Unmarried partners should be particularly cautious, as they have fewer legal protections in the event of a relationship breakdown.
Additionally, it is crucial to keep clear records of contributions made to a partner’s pension. This documentation can be invaluable for tax purposes and in the event of any future disputes.
In an age where financial resilience is more important than ever, contributing to a partner’s pension during periods of reduced earnings isn’t just an act of love – it’s a smart financial move that can secure a brighter future for both partners.
By taking advantage of tax efficiencies and maximising pension allowances, couples can work together to build a robust retirement fund that provides security and peace of mind for years to come.
Haydn Barlow is chartered financial planner at Equilibrium Financial Planning
