A little-known rule on pension contributions could help a worker boost their other half’s retirement savings by a substantial £67,000, investment specialists have highlighted. Most individuals aren’t aware that it’s possible to put up to £2,880 annually into a non-earning partner’s pension, which the government subsequently increases to £3,600 through tax relief.
Helen Morrissey, from Hargreaves Lansdown and an expert in retirement analysis, commented to say: “Partner pension contributions are a real hidden hero that can give your pension a massive boost.” Their firm’s investment gurus ran simulations of two different circumstances for someone consistently paying into a pension from age 22 until retirement at 68 with an initial salary of £28,000.
In one simulation, the individual ceased contributing to their pension for five years from 32 to 37, maybe due to child-rearing breaks, without resuming until the children began schooling. Alternatively, in the second situation, during these five years, the person’s partner compensated for the career break by contributing the full £2,880 every year – an amount rounded up to £3,600 with pension tax relief.
The second approach resulted in a significant difference: a total pension pot of approximately £398,000 by age 68. This represents a £67,000 increase compared to the scenario where no partner contributions were made during the five-year hiatus. Hargreaves Lansdown has highlighted a secondary benefit of this move, stating that splitting income between two partners allows for optimal use of each person’s tax-free personal allowances. This strategy could effectively enable a couple to receive up to £25,140 pension between them before incurring income tax.
Helen Morrisey commented to say: “Even relatively small contributions can make a huge difference. The time those extra contributions spend invested in the market keeps up the momentum of building your pension over the long term. It can not only significantly strengthen your own retirement resilience but that of your family overall as well. It’s a strategy well worth considering if there is the extra money in the family budget to allow for it.”
The firm based its modelling figures on an assumed growth of 5 percent and fees of 1 percent. However, they did not account for inflation, meaning their purchasing power will be lower than today’s value.