How to use your partner’s pension to reduce tax – and protect it if you split up

If you struggle to max out your own pension contributions, you might wonder why on earth you’d ever contemplate paying into someone else’s.

But paying into your partner’s pension – or having them pay into yours – is a little trick that can help you cut your collective tax bill.

Rebecca O’Connor, director of public affairs at PensionBee, said: “Depending on your circumstances, it can be a good way to maximise tax relief earned on your joint contributions, and to minimise tax paid on your household retirement income.”

However, things can get tricky if you split up – particularly if you’re not married.

Here, Telegraph Money takes a closer look at how you can use this trick to keep more of your hard-earned cash out of the clutches of the taxman.

When could paying into your partner’s pension be worth it?

In most instances, it makes most sense to pay into your partner’s pension if you’re both in different tax bands.

There are potential advantages for maximising both the higher and lower-earning partner’s pension, depending on your saving goals.

Maximising higher-rate tax relief

If your partner is a higher-rate taxpayer, and you are a basic-rate taxpayer, choosing to both pay into their pension means your contributions will attract higher-rate tax relief.

This is because relief is paid at the rate of income tax of the pension holder, and not the individual making the payment.

Ms O’Connor said: “You will get relief of 40pc, as opposed to the 20pc relief you would have received if you had paid the money into your pension.”

Thanks to this tax relief, a £10,000 pension contribution costs a higher-rate taxpayer as little as £6,000, but would cost a basic-rate taxpayer £8,000. 

This could result in a bigger pot for you both to share in retirement.

Rio Stedford, financial planning expert at Quilter, said: “You may wish to explore whether to top-up your partner’s pension, rather than your own, to ensure you are receiving the maximum tax relief available. This will reduce the amount paid to the taxman.”

Boosting low earner’s savings

Aside from the tax perks, there are also benefits for both partners to pay into non-working or low-earning partners’ pensions – particularly if the higher earning partner has reached their £60,000 annual limit.

If your spouse is not working, you can pay up to £2,880 per year into their pot, and the Government will top it up to £3,600 through tax relief.

Helen Morrissey, head of retirement at Hargreaves Lansdown, said: “This is a hugely tax-efficient way of using any spare cash. This is particularly the case if you have used up your own annual allowance and are helping your partner maintain their pension provision during periods of time when they are not working, so you are building your overall family resilience.”

While this can create more of a level playing field, you need to remember that once paid into a pension, this money cannot be accessed until at least age 55 (set to rise to 57 in 2028).

Ms Morrissey added: “You need to be sure you won’t need to access the money beforehand.”

Getting a helping hand to pay into a pension can be especially important for women who may have fallen behind on saving while taking time out of work to look after children or other family members.

Not forgetting, of course, the fact women are, on average, paid less than men.

New findings from interactive investor show that women in the private sector have 35pc less pension wealth than men by the time they reach their mid-50s.

Alice Guy, head of pensions and savings at interactive investor, said: “Women are often less able to work full time, instead spending more time caring for elderly relatives or children. This inequality means women often find it harder to build wealth.”

For women working fewer hours and earning less over their working life a joint approach to saving can offer a real boost.

How to go about it

Anyone is allowed to pay into their partner’s private pension – hypothetically, anyone can make pension contributions on anyone’s behalf. 

Each year, you can put up to £60,000 into your own pension, or 100pc of your earnings (whichever is lower). This is the annual limit on contributions that will receive tax relief.

In addition, you can pay up to £60,000, or the equivalent of your partner’s maximum earnings, into their pension.

There is no longer a Lifetime Allowance for pensions, after the Government abolished it earlier this year, meaning there’s no maximum on how big your pension can be.

That said, there is the possibility it could be reintroduced by a future Government – so be mindful of this.

Minimise the tax you pay in retirement

As well as thinking about maximising tax relief, you might also want to consider the tax implications of your respective pension pot sizes when you come to retire.

Ms O’Connor said: “You pay tax on income from a pension at the same rate you pay tax on earned income.”

This could be at 20pc, 40pc or 45pc.

Ms O’Connor added: “In order to minimise the tax you will both eventually pay, you could consider, for example, boosting your partner’s pension pot, if there’s a chance that contributing more to your own would push you into a higher tax bracket when you reach retirement.”

This could mean that even though your overall household income would be the same, you could be paying less tax on it.

What happens to pension savings if you split up?

One of the downsides of solely paying into your partner’s pension is that you do not each have your own pot, which could become a problem if the relationship ends.

Ms O’Connor said: “Clearly, the big risk is that you might not stay together. If one of you had paid into the other’s pension and there was no written agreement giving details of how much you had contributed to your partner’s pension over the years, this could leave you high and dry in retirement.”

If you are married and get divorced, one of the discussion points on dividing up assets should be the division of the pension, based on contributions.

Pension Sharing Orders are court orders that divide up pension assets.

Ms O’Connor said: “It’s worth noting that these can take into account not just direct financial contributions to someone else’s pension, but also indirect contributions to someone else’s ability to work and build up a pension. For instance, a non-working spouse who runs the household while the other partner works can be deemed to have contributed to their partner’s pension.”

Ms Morrissey added: “If both partners have been able to build a resilient retirement pot, this can make it less likely that there will be a claim to split a pension pot in the event of a divorce.”

If you are not married, you need to be extra wary of paying into your partner’s pension, as in the event of a relationship breakdown, you risk leaving yourself vulnerable, as contributions would not be protected.

Given payments to the other person’s pot would be viewed as a ‘gift,’ they could be subject to inheritance tax. If you have not tied the knot, it’s vital that you tread very carefully.

The key here is to put things in writing, and also not to completely rely on one partner’s pension at the expense of building your own.