Anyone who has a secure pension income of at least £12,000 a year in place can withdraw surplus pension funds via income drawdown with complete flexibility. While this can help pension investors get their money out faster, it can also help with family tax planning.
The secure element of your pension income can include your state pension, a pension annuity or a company pension. Investment income from other investments such as income drawdown, individual savings accounts or buy-to-let property, doesn't count. The HMRC website states that you cannot make pension contributions while in flexible drawdown. However, this applies to your own pension, not that of your spouse. This has raised an interesting question from IC reader, Phil.
He says: "I am older than my wife and earn more than her. We are 40 per cent and 20 per cent tax payers respectively. I have a self-invested personal pension (Sipp) which I intend to use between the ages of 60 and 65 at which time my public sector pension of £35,000 kicks in.
"What is to stop me drawing down an annual amount (to below the 40 per cent annual tax income limit), but twice what I had planned to draw down? I then live on half and put the remainder in my wife's Sipp (to be set up with this sole purpose in mind).
"So she then gets the 20 per cent tax uplift, hopefully the same capital gains and interest as I would have had if the money was in my Sipp. Result: 20 per cent annual income uplift.
"More so, if I still have Sipp money left when I do get to receive my public sector pension, I will now not have to pay 40 per cent on some of my pension income. I draw my Sipp down to nothing as planned. When ready, we draw down my wife's Sipp (instead of mine)."
Andrew Tully, pensions technical director at MGM Advantage, says: "Yes, contributions could be made into the wife's pension arrangement in this situation. Third-party contributions are possible, and for tax purposes are simply treated as if she had made the contribution. So tax relief would be down to her circumstances. If she isn't earning the maximum tax efficient contribution to a personal pension would be £2,880 (which grosses up to £3,600) a year. If earning, then up to her earnings can be paid in, although with an overall maximum of the annual allowance of £40,000 (including any other contributions being made to schemes, for example by her employer)."
