Is there any reason to put money into SAHP pension assuming we never divorce?

[Hobert]

Just wondering if I am missing something. We (as a couple) get a big tax advantage putting money into my pension as I am a higher rate tax payer. At the moment DH gets the NI payments through child benefit but we don't put anything into a private pension.

Assuming I have no intention of leaving him and the eventual pension will be joint is there any reason not to do it this way?

I assume a main benefit is his pension will be below income tax thresholds when it is paid out, whilst yours will not?

Tax advantage, yes.
However bear in mind that the pension money will be locked until I get to at least 55 or you die.

Luckily I got to 55 but will everyone?

You could just keep investing in isa for both of you or various other products and then u could access it whenever I need it.

Yes I pay all of it back and have to do a tax return anyway. I get the extra tax relief taken off my tax bill.

What if you retire at 65 and die the next day?

Only if/when u get to 55+ (might be even higher by then)

How do you plan to take the money out when you retire? If you are on a defined benefit pension, or buy an annuity, and die earlier then he will probably only get half paid out after, so would lose "your" half. Possibly lose more if AVC's were only counting for your life. If you are in drawdown then a pot of money remains. There may be a conflict of interest if you nominate someone else such as your kids as beneficiary and there may be tax implications. If I was him I would want the peace of mind of having some personal pension, even if small.

There is a point where splitting contributions between pensions and ISA makes sense. While you are earning you will be paying 40%/45% but in retirement with some carefully allocated funds you ideally need to be drawing down on both ISAs and pensions. You can then get to an effective 7% of tax on around £100k of 'manufactured income'.

If you die post-75 he'll have to pay income tax on it. If it's a big sun he could be pushed into 45% rate. That means he'd lose almost half in one go. Could leave him short.

The tax at the other end is important too. If you need an income similar to what you have now you'll be paying top rate tax. If you both have pensions you'll be able to massively cut the tax you pay.

Also they're talking about introducing a maximum limit to the tax-free cash lump sum. You could get round that by paying his pension.

If you divorce you'd have to give him a massive chunk anyway (possibly half), so I'm not sure the protecting him argument is that relevant.

But I'd definitely think about the post-retirement tax situation.

The other thing you could do is set him up a LISA. You can save up to £4K a year into that and get a 25% bonus. It's all tax free on the way out, so you mixing that with pension assets will reduce the amount you need to draw and your tax burden.

If I were you, I'd speak to an IFA and get them to model the tax scenarios based on the income level you'll need in retirement and they'll work out which approach is more tax efficient.

DH is too old to open a LISA but I will speak with an IFA about tax modelling. Thanks this has all been useful food for thought.

No DB element to the pension.

I am probably asking a silly question here but in theory when a couple divorce and as part of that they split a pension does the tax free aspect of what was paid in to that pension get re-calculated or does the pot just get split without taking that into account?

If the tax is not taken into account then is there anything stopping a couple divorcing just for the sake of pension sharing then re-marrying again after with their own separate pots?

I realise there is a cost to divorce (and re-marriage) and they would need to potentially split other assets (on paper) too but for a couple with one large pension pot from a high earner that cost could be worth it.

@OddBoots i believe that both would be able to get the tax free lump sum, provided the pension wasn’t already in drawdown

I think Oddboots means would the fact that pension is now owned by a lower rate tax payer mean some sort of tax claw back. I don't think it does - certainly never heard of that.

I didn’t take it that way.

On retirement, you can take a tax free lump sum of up to £275k (approx). If you divorced and split your (assumed large!) pension pot, you could still take a tax free amount of that, but so could your ex spouse.

Your pension doesn’t form part of your estate and isn’t left as an inheritance. The value is not taken into account for IHT.

If you have a defined contribution pension you need to make sure that your DH is named as a beneficiary. If you die before age 75 he can receive it tax free. If after 75 it would be taxed.