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Ian Browne: Making the most of the marriage allowance in retirement plans

Advisers can help clients make some substantial tax savings

The beginning of April heralded a new tax year and this brings updated tax allowances. Some of these new allowances can offer little gems to create value for clients and launch wider conversations about retirement planning in general.

One such allowance is the marriage tax allowance, which enables a client or their partner to give one another part of their personal allowance.

To be eligible, clients need to be either married or in a civil partnership. One needs to be a non-taxpayer and the other needs to earn less than £46,350. In other words, they cannot be liable to income tax at a higher or additional rate.

For the 2018/19 tax year, the personal allowance is £11,850 and the transferable marriage tax allowance is £1,190.

Clients can backdate their marriage allowance claim to any tax year since 5 April 2015. In year one, the allowance was worth £212 in tax. For the following tax year, starting April 2016, it was worth £220 and the year after £230. For this tax year it is worth £238. So, if a client is eligible for the allowance since it began, it is worth £900.

Dealing with drawdown

When combined with phased drawdown this effect multiplies.

Say you have a client, Stewart, aged 60, who is a basic rate taxpayer. His wife, Jane, has been retired for several years and so is not liable to income tax.

If they do not utilise the marriage allowance, they can crystallise £15,800 in total:

  • £3,950 tax free cash (25 per cent of the amount crystallised)
  • £11,850 income (tax free as within your personal allowance. It also represents 75 per cent of the amount crystallised)
  • Total tax-free income = £15,800

However, if they claim the marriage allowance, they can crystallise £17,386.67 in total:

  • £4,346.67 tax free cash (25 per cent of the amount crystallised)
  • £13,040 income (tax free as within your personal and transferred marriage allowance. It also represents 75 per cent of the amount crystallised)
  • Total tax-free income = £17,386.67

Taking the marriage allowance generates an extra £1,586.67 of tax-free income (or a saving of £317.33 in basic rate tax) per year. If this continues for several years, that is a substantial tax saving.

Broader strategy

The marriage allowance is just one tool that can be used as part of a wider planning strategy for couples thinking of their retirement as a pair. This broader planning needs to be considered carefully.

The UK population underestimates their life expectancy, which leaves them at a very real risk of running out of money.

And this is not just a personal issue. Say Jane and Stewart are pooling their retirement provision and will both be relying on the same sources. That pot needs to last for the one who lives the longest. If Jane is five years younger, and given she is woman, expected to live longer, this will need to be factored into their retirement plans.

But joint planning is not all about risk. It can offer opportunities too.

Let’s now take a look at a different couple.

Sarah and Luke want to have security of income and the flexibility that pension freedom offers. They want to enjoy their retirement but not at the cost of running out of money.

The adviser takes a look at what assets they already have.

Sarah used to be a senior nurse and has an NHS pension. This defined benefit pension cannot be transferred. Luke is a banker and similarly has a DB pension. They are retiring in the next couple of months and are considering whether they should transfer Luke’s DB pension to a defined contribution pension to achieve additional flexibility.

Given Sarah has a DB pension that offers a guaranteed income for life, including a spouse’s pension, their basic income needs are safe. Luke is in a position to transfer the DB pension. The combination of the two then offers the household the flexibility and security they require.

Holistic household financial planning in retirement is key, so steer clear of looking at one aspect of someone’s plan in isolation.

Ian Browne is pensions expert at Old Mutual Wealth

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