Did you know that three quarters of people are unaware they can contribute to their partner’s or child’s pension? In certain circumstances you can, and the contributions you make will earn valuable pension relief. In this post we look at how adding money to a partner’s or child’s pension pot works.
When you can contribute
Since 2001, you’ve been able to contribute up to £2,880 annually into the pension of a spouse, partner or child who doesn’t pay Income Tax. When you do this, they’ll get pension relief on the money. By adding the full amount, the contribution becomes worth £3,600.
This system can lead to some significant gains. Financial services company Hargreaves Lansdowne has calculated how much a pension pot would be worth if you’d added £2,880 annually since 2001. During this time, you could have added £65,736 into someone else’s pension. Pension relief would have increased this amount to £82,800. (This figure also takes into account the shift to 20% tax relief in 2008).
To take a long-term example, imagine you pay the full amount into a partner’s pension from the age of 30. By the time they retired at 68, their pension would be worth around £230,000.
How do I claim the pension relief?
Your partner or child can claim the 20% relief if they don’t pay Income Tax. This will normally be because they aren’t working or are on a low income. The provider will claim the pension relief on their behalf.
What if my partner or child is working?
If your partner or child is working, you can still add to their pension pot. However, contributions need to remain below their tax-free allowance. This is either 100% of their earnings or £60,000, whichever is the lowest.
Normally a pension provider will claim the pension relief. However, for some workplace pensions you need to get in touch with HMRC. You also need to let HMRC know if you make a new claim for a pension contribution over £10,000 or (if your current claim is over £10,000) you increase your claim by more than 10%.
Another benefit to contributing
In some cases, there is another major benefit to contributing to a partner’s or child’s pension. This is when you have used up your own pension allowances. By adding to a family member’s pension, you can significantly build up their retirement income thanks to the pension relief.
Make the most of pension relief
Making the most of pension tax relief is a great way of planning for the future. Many people – women in particular – say they would struggle to cope on their pension alone. By using pension relief to build up a partner’s or child’s pension, you can build up your family’s future financial security.
Pensions and tax planning
Pensions are just one element of successful tax planning. If you would like help with tax planning that takes into account not just pensions, but CGT, Inheritance Tax and general wealth management, get in touch with your THP account manager today.
About Jon Pryse-Jones
Since joining THP in 1978, Jon Pryse-Jones has been hands on with every area of the business. Now specialising in strategy, business planning, and marketing, Jon remains at the forefront of the growth and development at THP.
An ideas man, Jon enjoys getting the most out of all situations, “I act as a catalyst for creative people and encourage them to think outside the box,” he says, “and I’m not afraid of being confrontational. It often leads to a better result for THP and its clients.”
Jon’s appreciation for THP extends to his fellow team members and the board. “They really know how to run a successful business,” he says. He’s keen on IT and systems development as critical to success, and he continues to guide THP to be at the cutting edge and effective.