How to work out most efficient pension split- any pensions experts?

[OwlMother]

For a variety of reasons (self employment, having children when very young, general life!) DH and I have not done very well at pensions. We are now in a position to really focus on this and need to make a proper dent in it as we are getting closer to that age. I am 46, DH IS 50.

I have about £100k in a pension and earn £60k DH has next to nothing and earns around £120k. Dh employer contributes about 5%, mine about 15%.

We are contributing about £2,500 a month between us as salary sacrifice, as we need the rest of our pay to live on, and hind kids in uni. Is there a way we can work out how best to split this between us to work out how to maximise what we contribute tax wise?

As a starter for 10 I’d be looking at you contributing enough to maximise 42% tax and Ni relief (£10k in round numbers) and him £20k to avoid the 62% marginal tax he’s probably paying on the £100k to £120k bit. Neatly, that’s £30k gross that will cost around £14k net.

I think you need to put a spreadsheet together and do some modelling.

The first principle should be that you contribute from the highest tax bracket first, but the counter to that is the size of pot you end up with, and being taxed on withdrawal.

So at the extreme end of the spectrum don’t end up in a situation where you are paying £60k per year from your DH’s salary and ending up with just one pension pot in his name.

First both pay enough to get your full employer contributions if you need to pay matching contributions.
Second he should salary sacrifice to get under £100k. His marginal tax rate is 62% at £120k plus you’ll then be eligible for child benefit and tax free childcare (although your kids may be too old)
Third you should salary sacrifice to the top of the higher rate band so you don’t fall behind him too much.
Then any more from his salary.

Edited to correct my maths on the marginal tax rate!

You haven’t said how much is in your husband’s pot.

Based on your info, I think you should pay in £750/month to get the full 15% matching. He should pay in £1,750/month to get out of the +£100k tax trap.

This means he is effectively putting in £1,837.5 and you £1,500. In the long run you would want to keep pension pots even to maximise income tax payments when you retire. But for now, these contributions seem best.

Thanks everyone. DH doesn’t really have any pension to speak of, hence the need to get moving. we’ll alter his contributions to get him under £100k.

I don’t need to match to get the 15%, does it make sense to put even more into his pension in that case? One we have built larger pots we can try and balance things out a bit. My pay should rise by about £15k this year and the amount the employer pays into the pension will increase in line so my pot will build too.

Helpful thread. I am trying to work out how to do the same, salary is 68k with employer matching 10%. Are additional voluntary contributions (more than what employer matches) worth doing?

I actually find ChatGPT quite helpful in doing the maths on this. PP has nailed it though - your DH needs to salary sacrifice below £100k as will be extremely tax efficient; you should put in enough to get max employer contributions and then anything else you can afford on top. Long term it’s most efficient to aim for equal pots between you and DH brcause you’ll pay significantly less tax on eg 2x £30k incomes than 1 x £60k.

Yes, if you don’t need to match skip step 1 in my previous post. Start by getting him under 100k, then into yours to the higher rate limit, then into his.

You’re targeting tax relief at the highest band available. So 60% first (100-125k), then 45% (>125k), then 40%. Once you get to 20% it’s better to put money in an ISA, but I don’t think you can afford to squirrel that much!

As a pp said you’re also trying to target broadly similar pot sizes. It’s a secondary consideration to the tax relief, certainly with your current pots. But once you’re both in the 40% bracket you can pay into either pension and get the same benefit so you can balance the second and third steps as you wish.

(Be aware, if you were in Scotland tax brackets are completely different and so a lot of the specific advice you’re been given would be different)

Your DH is going to be in quite an unusual situation at that salary level with no pension. Why was he not contributing before? He’s potentially been throwing away 000s in employer match contributions.

Like others, I’d be wanting to get him under £100k as a minimum but really you should be going through your budgets to also think about whether you can save more and if you also need anything in an isa to bridge in case he needs to stop work before he can access the pension. That isn’t the most tax efficient but you might need a safety net.

Thanks all. @Bunnycat101DH was self employed sole earner for a number of years so no employer to match contributions and no spare cash to pay in himself. We know it’s not ideal which is why we are so keen to sort it out.

We will work on getting him under the £100k line and rebalance the contributions. We don’t really need any more income so any pay rise I get (anticipating c £15k in the next couple of months) can go straight into contributions, and employer will continue with their 15% of the higher value. Hopefully should begin to build up soon.