My pension pot is tiny, my husband's is on track - WWYD

[WaterJunkie]

My husband is a higher rate tax payer, I have a ltd company so take basic salary and dividends.

We share finances, no plans for divorce etc(!). For many years, we've prioritised my husband's pension due to the tax relief, but I'm wondering if we have too many eggs in that single basket.

Before the pandemic hit, I started a Vanguard SIPP and set up a company pension. This is at £9k, it's definitely nowhere near my target as my business was really badly affected by Covid. I'd allayed my concerns by saying at least we were investing in my husband's pension.

What would you do??

Ask him to contribute into yours?

Largely depends how far away you are from retirement age - although I have to say that the SSAS that DH and I set up on advice around 20 years ago, is really coming into it's own now. Like you, our business has been seriously affected by the pandemic, and the flexibility this gives us is massive.

Would it be worth you both seeing an FA and taking some advice?

We took wealth management advice. It was invaluable.

Speak to a financial advisor...

I'd check regarding tax efficiency and consider whether to make pension payments from your company ahead of salary. I think your company taxes will be reduced by pension payments?

But, I also understand that as a company director you are not restricted to how much can be paid into a pension from the company - so, your ability to "catch up" pension savings in the future, if and when your company is doing well enough to spare the cash, will be a lot more than for a salaried worker (ie, not limited to your personal annual income). By doing it later you don't get the compounding benefits, obviously, but if you are maintaining money in the company to build / rebuild your business, that may be able to fund your pension in the future. Depends somewhat on how confident you feel about your business doing well into the future.

Good luck!

[I'm behind on pensions too for various reasons, but am in a different situation with some hope of "catching up" down the track by means of company payments]

You haven’t said if you’re maximising all possibly tax relief at higher rate.
You also haven’t said what rate of tax you expect to pay when his pension is in payment.
He might get 40% going in, but pay 20% coming out. If you’re only getting 20% going in but paying 0% coming out, the higher rate relief isn’t always a no brainier. But, a full state pension would take you close to 20% taxation rate anyway.
With your exact details, you can work out with is better - and it’s most likely to be his.
There’s no eggs in one basket to worry about if you’re only looking at his pension vs your pension - because within one person’s pension planning you can choose many “baskets”.
So do you actually mean one basket as in, you’re worried in divorce you’d not get a fair share of his pension?

Well, usually men die earlier than women, so that's another reason why she might not want to have all the eggs in his basket.

Does it matter? In our marriage I am the earner and DH is not - he can therefore only contribute to a minimal pension. We have had financial advice yearly and it is always to focus on mine. My pension is not one single investment after all but many.

However we split all finances so at retirement age both his and mine pensions will be 'ours'

We aren't planning to divorce but I'm fully aware that if we did he'd have rights to my pension that way.

Talk to an FA and know what would happen in the event of a split or early death.

Then do what is fair. You are a partnership.

Watch out that his won't breach the 'lifetime allowance' limit otherwise the tax is higher. If it looks like it would be breached then divert contributions to yours. Best thing is to get financial advice.

@SpankyPankhurst

Well, usually men die earlier than women, so that's another reason why she might not want to have all the eggs in his basket.

Actually in some circumstances that would be extremely tax favourable to her!

Thanks, some really good advice here. I'll reply properly tomorrow when my brain cells are working!

Aside from arrangements for your personal pension, I would also ensure you are making sufficient NI contributions for your state pension. If you are self employed and taking a low wage, these might be voluntary contributions; or if you have children under 12, ensure you are registered for child benefit in your name (even if not claiming due to your husband's high earnings), as this will add to your NI years contributions.

With regards to your personal pension situation - as @Cocomarine mentions, being able to maximise both of your personal tax allowances when taking the pensions needs to be considered (which doesn't seem to be the case with the amount you have currently invested in your name). This income pot could be ring-fenced for utilising over a limited number of years, starting from your retirement date until your state pension kicks in.

Once your own pension investments are sufficient to likely reach an income equivalent to your own personal tax allowance, I think I would be considering switching further investments to an investment ISA. There would be no tax advantages to adding further to your pension. An ISA would have much greater flexibility in terms of access.

However, I would obtain some independent financial advice. If you are over 50 and have a defined contribution pension, you are entitled to a free appointment with an advisor at Pensionwise.

Thanks for everyone’s replies. Just to give more context to our situation:

• DH earns £80k. My income is more variable, but it’s generally £3.5k per month (£1k salary + £2.5k dividends).
• Our income goes into joint account, and DH pays into pension from our joint account.
• DH’s pension pot is £240k, mine is around £9k
• We plan to retire in 20 years
• NI contributions are up to date for both

My company pension payments will be a company expense, so I’m thinking I’ll probably reduce my £2.5k monthly dividends (which makes up part of our family income) and use part of this for my company pension contributions.

Based on the numbers above, I think it’s highly unlikely that we’ll be taxed on higher rate coming out?

All along, we have gone this way as DH used to have a good company pension, but has since moved companies and has opened a SIPP instead and maintained the contribution levels. My earnings have been affected by our having a family, and taking greater responsibility. We have zero plans for splitting up or divorce, but I value my independence and want to be free of this issue clouding any future decisions that might need to be unexpectedly made!

We did see a IFA before the pandemic. After some initial advice, we decided it was actually better to set up the Vanguard SIPP as the IFA fees were pretty high.

Oops, DH's income is £75k. He's also paying 5%/employer pays 3% into a seperate company pension as well as the SIPP.

@WaterJunkie 'on the numbers above, I think it’s highly unlikely that we’ll be taxed on higher rate coming out?'

The point I was making is that the first £12,500 (currently) of pension payout in your name won't be taxed at all because of your personal allowance. Your husband will have a similar tax free allowance. Plus a tax free lump some of 25% of the total pot.

You could use your pension pot to withdraw up to £12500 each year from your own retirerment pot in the years between initial retirement and claiming your state pension.

So, suppose you plan to retire at 60 and state pension kicks in at 68yrs.
You could aim for a personal pension pot that would pay £12500 for 8 years plus the 25% lump sum, and aim to pay no tax on it.
In effect you would have £25,000 tax free income between you, rather than just your husbands allownace if claiming from only his pension.

(I'm not a qualified financial advisor, so please do your own research/due diligence).

Just to give an idea of the tax savings involved...

Possible ideal pension pot for you £135,000
Take tax free lump sum of £33,750
Take annual income of £12,500 over 8 years.
Tax liabilty nil

Or husband has larger pot and withdraws the same amount as extra income from his pension instead of investing in yours, and was liable for tax at basic rate..

£12,500 at 20% tax = £2,500
over 8 years = £20,00 tax due.

Good point @seekingasimplelife ... thank you.

It is actually in his interests to pay money into your pension to the maximum amount as he is likely to reach the Lifetime Allowance limit.

@simmonslulu

It is actually in his interests to pay money into your pension to the maximum amount as he is likely to reach the Lifetime Allowance limit.

It’s only at £240K though, so he has a long way to go. The tax relief for someone on £80K is fantastic and every budget there are articles suggesting it could be withdrawn… So whilst I totally agree with you that they should be keeping an eye on the LTA, I think it’s far too early to switch to less tax relief (in OP’s pension) because of it.

@SpankyPankhurst

Well, usually men die earlier than women, so that's another reason why she might not want to have all the eggs in his basket.

irrelevant. If he dies before he's 75 she'd be better off as the whole lot would be tax free!

Some income to use a personal allowance is indeed the reason to diversify some payments.

If your business can't afford to pay its key employee (you) a pension, it's not viable. If you worked anywhere else you'd get an AE pension as a minimum. Don't abuse yourself!

Given the size of the pot now @ £240k, I think there’s minimal risk of him reaching the Lifetime Allowance Limit so perhaps absolutely best to continuing to maximise tax relief via his pension but also making an effort to invest into mine.

In terms of my company pension, since the pandemic, my accountant suggested prioritising investing in the business as I’d diversified into a new area. But, tbh, I’m not sure I should hold off much longer and rather than thinking about it from an all-or-nothing POV, I should commit to investing something (which is much better than 0).

Just to add... DH definitely views the pension as ours and something that we've accumulated together. But, as I say, it does feel a little imbalanced so I want to rectify that, whilst being as tax-efficient as possible.

@WaterJunkie your accountant may not realise that as long as you have not defrauded your creditors, putting money in a pension is one area that if (hopefully not) your company went bust that the money can not be taken out of. They can pretty much asset strip you of anything else, but the pension is a trust.