Can I use my wife’s tax breaks?

Olivia Rudgard finds answers for readers on managing a couple’s pensions, staying tax-free and making the best of a lump sum after early retirement

Pooling pensions

Could you tell me if I can claim back tax taken from my private pensions on the grounds that my wife has only a basic pension with a maximum income of well below the tax free allowance? Can I pool our state pensions and my private pensions and then divide by two? GH

Married couples are now treated as separate units under pension rules. This hasn’t always been the case, according to James Hender, head of private wealth at the accountancy firm Saffery Champness. “It is only since 1990 that wives began to be legally treated as economically independent. Before that, income within a marriage was pooled and the husband would then file a joint tax return.

“Since 1990, everybody’s income and allowances have been treated individually,” he said. This means that you won’t be able to pool your income with your wife’s, because of tax advantages or anything else.

Marriage does still allow for some limited tax breaks. The generosity of these depends on how old you are, and they are somewhat fiddly to claim.

Mr Hender explained: “While you can’t pool pension pots to get a joint tax advantage, there are options on the table that provide some support for married couples. The marriage allowance, which was first introduced in the 2015-16 tax year, allows for a certain amount of the annual personal allowance to be shared by a couple.

“If one partner in the marriage is a basic-rate taxpayer and the other partner earns below the personal allowance threshold of £11,000, then a portion of the personal allowance – 10pc in 2016-17 – can be transferred to the higher earner. This can reduce the higher earner’s tax bill by £220 a year.”

Older couples benefit from the more generous married couple’s allowance, which can be worth more than £800 a year, as long as one spouse was born before 6 April 1935.

Will I be tax-free?

My pensions income for 20167 will be less than the £11,000 personal allowance. However, my income from savings will be in excess of £1,000, so I will exceed the personal savings allowance. If my total income is £13,000, will I remain tax-free even if I exceed the £12,000 made by adding together these two allowances? CM Because your income is less than £16,000, the personal allowance and starting rate band for savings work together to make your total income tax-free.

The starting rate band for savings was cut from 10pc to 0pc in the 2014 Budget from April 2015. This means that anyone with income of less than £15,500 will not pay tax on their savings.

You used to have to apply for the starting-rate band, but since interest began to be paid gross in April this year it should apply automatically.

Gary Smith, financial planner at investment company Tilney Bestinvest, said: “If we assume that your total income will be £13,000 for the current tax year and that your pensions account for at least £7,000 of this income, then you should remain tax-free.

“Your pension income will fall within your personal allowance of £11,000 with no tax payable.

“Furthermore, as your earnings are below £16,000 you should also qualify for the starting-rate band for savings, which provides 0pc rate of tax on the first £5,000 of savings income.

“In addition, you should also be entitled to the £1,000 personal savings allowance due to your basic-rate tax status.”

Lump sum options

I am 43. I had to take medical retirement from the prison service. I will walk away with a lump sum of £28,000 and a pension of about £380 per month. What can I do with this to maximise it? GR You are unlikely to qualify for benefits, so your plan depends on whether or not you are able to work. Your options are somewhat narrower because of extremely low annuity rates.

In the past you could have considered a purchased life annuity with guaranteed income, part of which was tax-free, but this is unlikely to be worth it even with the extra you would get because of ill-health.

Jeannie Boyle, chartered financial planner at EQ Investors, said making sure you have enough to live on should be the first thing to consider. “If your ill-health means you are no longer able to work then your first priority will be to ensure you have enough to live on: £380 a month is unlikely to be sufficient, particularly if you’re living alone.

“Most benefits are only available if capital or savings are less than £16,000. The first £6,000 is ignored, after which there’s a reduction of £1 per week for every £250 up to £16,000.

“There are strict rules about deliberately depriving yourself of assets, so don’t be tempted to blow £12,000 in order to qualify for state benefits. Your ill-health may mean you can claim personal independence payments to help with additional costs,” she said.

In this situation you should hold your money in cash because investments would be too risky, Ms Boyle added. Look out for high-interest-paying current accounts to maximise your income. Many have restrictions so make sure you qualify.

“Without any other assets to fall back on, you would not be able to deal with investment losses, so cash deposits are the most appropriate way to hold your money.

“Tax is not an issue in this instance – your income is well within the £11,000 personal allowance.”

However, if you can continue to work in an alternative job, low-risk investment could be considered, either in the stock market or in a structured deposit.

Ms Boyle said: “After leaving aside enough money to cover financial emergencies, either a low-risk portfolio or a structured deposit could help.

“Typically, structured deposits last for five years with the returns linked to the performance of an index, usually the FTSE 100.

“Deposit-based structured products generally come with a capital guarantee so you get your money back at the end of the term, even if the stock market hasn’t performed as expected. But bear in mind that the capital guarantee is only as good as the company that issues it.

“These products can be quite complex, so a low-risk portfolio invested in a portfolio of absolute return funds, fixed interest and a small allocation to equity funds could be preferable.

“The aim would be to provide better returns than a deposit account while taking minimal risk in order to preserve capital.”