My wife is working part time so is just under the tax threshold. She is in a workplace pension scheme paying in the most she can to maximise her employer’s contributions.
I am in full time employment and in the higher tax bracket. I have an old defined benefits pension and current defined contributions pension with a pot in excess of £200,000.
My question is what is the best way to boost my wife’s own pension.
Planning ahead: What’s the best way to top up my wife’s pension so we can afford to retire at the same time?
Can I pay in to her scheme and offset my higher rate tax? Should I just transfer her money to offset a wage reduction by her paying more direct from her salary?
She qualified for the Lifetime Isa and is currently at a very basic minimum so is it best to use this rather than a pension?
I am 50 and she is 40. Ideally I would retire at 60 and my wife at 50. She is registered disabled and receives allowances but not motability.
My logic is that my wife can access her own funds that have a good sized income.
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Steve Webb replies: Before thinking about ways to top up your wife’s pension, it is worth looking at the ages at which you can access pensions and Lifetime Isas, as these could cause considerable problems if your wife wants to retire at 50.
Starting with pensions, there is a standard age at which people can start to take money out of a private pension, which is called the Normal Minimum Pension Age.
Unless a pension has some special features (or was opened years ago when the rules were different), the NMPA is currently 55.
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However, because state pension ages are increasing, the government has decided to increase the age at which you can first access any private pension.
The rough idea is that there would be a gap of ten years between the first time you can access a private pension and the point at which you can draw a state pension.
As a result, when the state pension age rises to 67 in April 2028, the NMPA will rise to 57. Further increases are likely, so for someone of your wife’s age it is a fair assumption that her NMPA could be 58 or higher.
If she wants to have funds to access at 50, then having them in a pension is probably not a good idea.
There is also an issue with accessing funds in a Lifetime Isa. Apart from taking money out for a deposit on a property, money cannot be taken out of a LISA before the age of sixty unless you are willing to pay a penalty for doing so.
If you take money out of a Lifetime Isa before 60 you have to pay back the Government bonus plus an additional 5 per cent charge.
For example, if you initially put in £80 into a Lifetime Isa and get a Government bonus this takes your balance to £100.
But if you try to access that £100 before the age of 60 you have to pay 5 per cent (£5) as a penalty and hand back the £20 Government bonus, leaving you with just £75.
In the case of a pension and a Lifetime ISA, the reason for these rules is that they give you tax breaks or bonuses as a reward for tying money up for your retirement, and they weren’t really designed to be accessed as young as 50 (other than for house deposits in the case of a Lifetime Isa).
A woman in average health who reaches 50 can typically expect to live to around 87, so retiring at fifty would mean spending more than half her adult life in retirement.
I understand of course that you are trying to make a joint decision here and that if your wife is not in the best of health this may be influencing your approach.
If you did decide to go down the route of boosting your wife’s pension, perhaps by paying into her pension directly, the way the system works is that it is treated as if she had made the contribution rather than you.
In other words, you don’t get any tax break for the payment, but she could get standard rate relief (even though she is a non-taxpayer) if her workplace pension scheme delivers tax relief through the ‘relief at source’ method.
I think there is a strong case for the two of you sitting down with a financial adviser to do some ‘cashflow planning’.
We have already looked at the minimum age at which your wife could access a pension or a Lifetime Isa, but there is also your final salary pension (where you may have some flexibility as to when you take it), your ‘pot of money’ pension (which you can probably access at 55) and then your respective state pensions which are likely to be payable in your late 60s.
Although you have a clear goal for your retirement, you need to make sure that the timetable you have in mind is consistent with having enough to live on both when you are newly retired and in later retirement.
Something else a financial adviser could look at is your respective positions with regard to income tax.
When you pay into your own pension you get income tax relief at the higher rate, which is more than your wife gets on contributions into her pension.
On the other hand, there’s a chance that your wife might be a non taxpayer in retirement – particularly until she draws a state pension – whereas you will probably be a taxpayer of some sort on any pensions saved in your name.
An adviser can take account of these differences in recommending a strategy going forward.
Finally, although it is not a very cheerful topic, an adviser could also help you think through what would happen when you die.
In particular, you would want to ensure that if your wife outlives you, she is properly provided for, and this is something else to take into account when deciding how to plan for later life.
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.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected].
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 MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
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.
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