Pension contributions: should you pay into your partner’s pension?

Diverting some or even all of your pension contributions into your other half’s pension could be more tax efficient and lead to a more comfortable retirement.

Enjoying a comfortable retirement doesn’t happen by accident.

Building a sufficient pension only really happens if you put money aside regularly, making contributions to your pot over a long period.

But if you are in a couple then you need to think not only about your own personal pension, but that of your other half.

One tactic that may be worth considering is diverting those contributions away from your own pension and into your partner’s instead.

My partner has no pension

There are a few different reasons for doing this, and it could mean that as a couple you are better off overall.

Let’s start with the simple example of a couple where one partner has a decent private pension, and the other has little to nothing saved. 

In retirement, just as during your working years, you benefit from the Personal Allowance, which sets out how much you can earn each year before paying Income Tax.

If one partner has little, or even nothing, saved in a pension then they won’t be getting close to making the most of that Personal Allowance.

As a result, between the couple that’s tax-free income that’s being missed out on.

That same thinking extends to the broader tax bands. 

If a couple is hoping to have a joint income of £60,000 in retirement, then it may make sense to spread that out across two pensions if possible.

If both parties are getting £30,000 from their pension saving then they will only be paying the basic rate of Income Tax, whereas if all of that money is coming from a single pension income then they will be paying the higher rate of Income Tax on some of that money.

Focusing on a single pension

However, there is also an argument for going the other way and focusing your pension contributions into a single pension if one partner is a Higher or even Additional Rate taxpayer.

That’s because you get tax relief on contributions based on the Income Tax band of the person receiving the contributions.

So money paid into a pension pot belonging to a Basic Rate taxpayer will bet a 20% top up to their contributions, but if that money is paid into a Higher Rate taxpayer’s pension it will instead be topped up by 40%.

This grows to 45% for those paying the additional rate. 

That could provide a substantial boost to the eventual size of that pension pot, leaving you better off overall, particularly if both parties are going to be getting all of their Personal Allowance.

How much can I contribute to my partner’s pension?

It’s important to bear in mind that there are some boundaries around how much you can pay into someone else’s pension.

You can pay in up to 100% of the other person’s salary, up to the level of the annual Pension Allowance.

If the person is not working then the maximum you can contribute is £2,880 a year, to which a £720 tax relief boost will be added, taking the total to £3,600.

Going beyond the maximum

Another factor to bear in mind here is the annual limit on pension contributions.

This sets out the maximum that can be paid into a pension pot, and still get tax relief on those contributions, and is currently set at either £60,000 or 100% of your qualifying earnings, whichever is lower.

If you have already hit that cap but still fancy getting the tax relief top-up from the Government, then putting those additional contributions into your partner’s pension rather than your own is a tax-efficient strategy.

It doesn’t have to be your partner of course.

You could instead opt to make those additional contributions into the pension of your child, for example.

The downsides to paying into someone else’s pension

Opting to pay into another person’s pension is not without its risks though. 

For one thing, you’ll need to think about what happens if you split up. If you have focused on a single pension pot, then how is it going to be divided between you?

This is particularly a risk if you are unmarried since there are no legal protections over the division of assets that apply when it comes to a divorce.

Even if you stay together, if you are not married then the contributions are classed as gifts under the Inheritance Tax rules, so there could be an issue should you pass away within seven years of making the contributions.

Paying into someone else’s pension is not a decision that should be taken lightly ‒ it may be worth getting independent advice to ensure that it works out best for your circumstances.