When you’re in a loving relationship, your finances could be at the back of your mind as you focus on living in the moment.
Yet, planning your finances together as a couple is often incredibly beneficial, as doing so could strengthen your relationship and boost your savings.
In fact, a report from PensionsAge revealed that nearly half of couples who worked together to plan for retirement were on track for a moderate income, but this fell to 40% for those who planned separately.
Since 14 February was Valentine’s Day, now could be the perfect time to explore why planning your finances as a couple could leave you and your partner in a more stable financial position. Continue reading to discover five reasons why this is the case.
1. It may help you create a tax-efficient retirement income strategy
By using a joint income strategy during the next phase of your life, you and your partner could potentially pay less tax as a couple on your retirement income. This could allow you both to take home as much of your pension withdrawals as possible.
For instance, you can usually both access 25% of your pension as a lump sum without incurring a tax bill.
Then, any income you take from your pension is added to your other earnings and taxed at your marginal rate. Since you only pay higher-rate tax on your income that exceeds £50,271 as of the 2023/24 financial year, you could each draw £100,000 of income from your pensions between you and only pay basic-rate Income Tax.
As you can see, some financial forethought as a couple could help you build a tax-efficient retirement income to fund your dream lifestyle when you eventually stop working.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
2. There are a few tax benefits you can make the most of between you
There are also several helpful tax benefits you can make the most of if you plan your finances strategically as a couple – read on to find out more.
Pension tax relief
Pensions offer a remarkably tax-efficient way to save for your future, as each year, you can benefit from tax relief on contributions.
If you plan your finances together, you could be strategic about this tax relief you’re offered on pension contributions.
For example, the Annual Allowance – which is the amount you can contribute to your pension each year without facing an additional tax charge – stands at £60,000 as of 2023/24, or 100% of your earnings, whichever is lower.
Bear in mind that your Annual Allowance may be reduced if you’ve flexibly accessed your pension. This is called the Money Purchase Annual Allowance, and it stands at £10,000 as of 2023/24.
You’ll receive basic-rate tax relief on your contributions automatically. Meanwhile, if you’re a higher- or additional-rate taxpayer, you can claim more tax relief through your self-assessment tax return.
Crucially, though, you and your spouse or partner can contribute to each other’s pensions. Tax relief is then paid at the marginal rate of whoever’s pension it is.
As such, it could be beneficial to maximise any tax-efficient pension contributions into one of your pots if one of you pays a higher rate of tax.
Capital Gains Tax Exempt Amount
You usually pay Capital Gains Tax (CGT) on any profits from selling assets, such as a second property, non-ISA investments, or certain possessions such as art or jewellery.
Each year, you have a CGT Annual Exempt Amount, which stands at £6,000 as of 2023/24. That said, if you work together with your partner and combine your individual CGT exemptions, you could make more significant gains without paying the tax. This could allow you to realise up to £12,000 in gains between you without facing a tax charge.
Bear in mind that the CGT exemption will be cut to £3,000 in 2024/25. That might make it all the more important to plan together as a couple and make the most of both of your exemptions, now and when the new tax year begins in April.
Marriage Allowance
If you’re married or in a civil partnership, and one of you earns below the Personal Allowance for Income Tax, the lower earner can transfer some of their allowance to the other.
To apply for this, the higher earner must be a basic-rate taxpayer and normally have an income below the Personal Allowance, which stands at £12,570 as of 2023/24.
Then, the lower earner forfeits £1,260 of their Personal Allowance to their partner, who can make use of it and reduce the amount of tax they pay. The government website reveals that this could reduce a potential tax bill by up to £252 in a year.
It’s important to note that, unlike some of the tax-saving benefits mentioned in this article, the Marriage Allowance is only available to couples who are married or in a civil partnership. As such, if you’re cohabiting but not married, then you won’t be liable for this benefit.
3. You could reduce the Inheritance Tax liability on your estate
If you’re married or in a civil partnership, you could reduce your Inheritance Tax (IHT) liability by planning your finances together.
Indeed, when you die, your loved ones typically must pay IHT on the value of your estate that exceeds the nil-rate band, which stands at £325,000 as of 2023/24.
On top of this, if you leave your primary residence to a direct lineal descendant, they may be able to claim an additional “residence nil-rate band” of up to £175,000. This means you may be able to pass on a total of up to £500,000 before IHT is due.
If your partner has already passed away, you can typically add their nil-rate band to your own, doubling the amount you can leave to your next of kin tax-efficiently.
This could mean that you could leave up to £1 million in assets before it is liable for IHT, which could help you reduce a potential tax bill if you and your partner hold many assets.
However, even though you can typically pass on more wealth without incurring an IHT charge when you plan your finances as a couple, you may still want to reduce the overall size of your estate – especially if the total value exceeds your nil-rate bands.
You could do this through gifting your wealth directly to your loved ones. As of 2023/24, you can gift up to £3,000 each tax year and have it fall outside of your estate for IHT purposes. This allowance is individual, meaning your spouse or civil partner can make use of it too.
As such, if you plan your gifting with your partner, you could reduce the value of your estate by up to £6,000 each year, which could make the difference when your next of kin inherit your assets.
The Financial Conduct Authority does not regulate estate planning..
4. You’re more likely to secure your financial future
Aside from the more tangible benefits of planning your finances as a couple, doing so could also mean that you’re more likely to achieve any goals you’ve set yourself, ultimately helping you secure your financial future together.
Even if you have some individual goals as well as shared ones, supporting each other can be a great motivator to help you achieve what you want, both on your own and as a couple.
In fact, simply just talking about money regularly as a couple could help you secure a more stable financial position.
Indeed, a report from the Guardian found that around two-thirds of couples who regularly talked about money had enough left over at the end of the month compared to half of couples who didn’t talk about their financial situation.
5. It could strengthen your relationship
There’s a good chance that, at some point in your relationship, money worries have put a strain on your emotional wellbeing, often deteriorating your connection.
In fact, a study reported by the Guardian revealed that money worries are one of the most common reasons for relationship troubles.
While it can be tricky to broach conversations about money at times, tackling any issues head-on now rather than later could help you develop a stronger relationship with your partner.
For instance, having different attitudes towards spending and saving could quickly lead to resentment if your beliefs aren’t aligned.
Conversely, if you’re both open and honest about your financial opinions, goals, and worries, you could find a way to progress towards your targets together in a way that feels comfortable for you both, ultimately strengthening your relationship.
Get in touch
Much like planning your finances as a couple can be beneficial, it’s also practical to enlist the help of a financial adviser.
Please email us at info@investmentsense.co.uk or call 0115 933 8433 to find out more.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.
