Career breaks don’t have to mean pension breaks!

Pensions

Alistair Hardie

17th February 2014 at 4:11pm

Looking at some figures in the office recently, I was surprised to see an example where the average personal pension savings for men were £70,000 higher than the women’s average.  It got me thinking – how could this be addressed?

This pension savings gap was on my mind a few weeks ago, when I was standing on the touchline watching my eldest son’s team play rugby. The mood amongst the watching parents had changed from cautious optimism to despair as the away team ran in a few early tries.

To take my mind off matters unfolding on the field, I struck up a conversation with a few of the fellow dads whose facial expressions had become Victor Meldrew-like. The rugby chat was understandably brief. But we quickly established that we had something in common. Our wives or partners had taken or were taking career breaks to look after the children.

No break in pension play

I suspected few, if any, of the dads knew that they could actually help to fund their wife or partner’s pension during a career break while enjoying some potential tax benefits too. Although they didn’t say it, I sensed a collective ‘I don’t believe it!’

The context here is that a number of the dads were in the fortunate position of having already paid the maximum into their own pension. Even if your wife or partner isn’t earning, you can pay in up to £2,880 each year (£240 a month). The government adds basic-rate tax relief of £720 to top this up to £3,600. I’ll explain the relevance of this point later. Here’s what I told them:

a) Your spouse or partner can set up a personal pension and you can make payments into it.

b) Even if your wife or partner isn’t earning, you can pay in up to £2,880 each year (£240 a month). The government adds basic-rate tax relief of £720 to top this up to £3,600.

It pays to have a game plan

The long-term benefit of topping up someone’s pension while they’re on a career break can have a real impact. Let’s assume my wife sets up a pension and I contribute £2,880 for seven years. In each year, the government will top that up to £3,600. Even with no further contributions, this could be worth around £95,000 * in 30 years’ time. Taking account of inflation, that’s around £52,000 in today’s money. It makes the most of the double boost of the government top-up and compound investment growth which can add up over three decades. And of course, pensions can be flexible and my wife could start to pay-in again once she returns to paid employment.

Dad doesn’t need to sit on the bench

I mentioned earlier that paying into a pension for your loved one was discussed against the backdrop of some of the dads’ pensions being fully funded.

If, however, dad has some headroom in his own pension, and is a higher or additional rate taxpayer, then there’s an alternative to paying into another pension which has even more tax benefits.

If dad can pay into his own pension, the tax relief is higher. He’ll get tax relief at the rate he pays, so potentially 40% (or 45% if an additional rate tax payer). for couples, you could miss a trick if you don’t look at your financial planning as a household This beats the 20% tax relief when paying into someone else’s pension in the first example.

Whether dad has space in his pension depends on whether he’s used his annual allowance and whether he’s near his lifetime limit for saving into pensions.

Retirement income can be a team effort

The two scenarios here are a reminder that, for couples, you could miss a trick if you don’t look at your financial planning as a household. So if, like me, your other half is looking after the children, there’s definitely something you can do to help improve the overall savings you have to look forward to in retirement.

And the rugby?

You guessed it – we lost, no phoenix from the flames come back I’m afraid.  However, as we all trudged off to the car park, I felt after all the conversations, the day hadn’t been a complete loss.

*Assumes 5% annual growth, 2.5% inflation rate and 1% annual management charges

**www.ons.gov.uk/ons/rel/family-demography/family-size/2012/family-size-rpt.html

The information in this blog is not financial advice. A personal pension is an investment. Its value can go up or down and may be worth less than you paid in.

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