During a month filled with romance and proposals, it is appropriate to think about what couples should be considering in financial planning terms, writes Clare Moffat, technical manager at Prudential...
There are still some advantages to being married, or in a civil partnership.
Married couples' allowance
This does still exist for couples who are married or in a civil partnership if one of the parties was born before 6 April 1935. The tax saving for 2012/13 is a minimum of £296 and a maximum of £770.50. That does mean that one of the parties will be 77 this year but the other could be 21!
Paying into a spouse's pension
If an individual has enhanced or fixed protection, or they have reached the annual allowance (with no carry forward available), then paying into a spouse's pension can be a very good planning strategy. This is not just for married couples or those in civil partnership arrangements, as those in relationships, children or grandchildren, can also benefit. However, couples should be thinking about equalisation of assets in retirement so that all personal allowances can be used.
Where the spouse has no relevant earnings, then £2,800 net per year may be paid into a personal pension. This gives the spouse a gross contribution of £3,600 which, in turn, has the effect of increasing pension provision for the spouse and reducing the individual's estate for IHT purposes.
In addition, if the spouse is a director or employee of a business then an employer pension contribution can be made. This reduces the corporation tax payable by the company and increases the pension provision.
However, it is important to beware of the 'wholly and exclusively' rule. A spouse cannot be employed as a secretary and receive a £50,000 pension contribution if another secretary only receives £1,000 in pension contributions. The "wholly and exclusively" rule would then apply.
In the example described above, the level of the remuneration package would be excessive for the value of the work undertaken. The wholly and exclusively rule may be slightly less onerous if the spouse is a director of a business as it is more difficult to place a value on the input of a director. It is best to discuss this with an accountant but the rule of thumb is that if the question has to be asked about whether the pension contribution is excessive then it probably is.
If an individual is married or in a civil partnership and they have not built up enough national insurance contributions, then they can receive a basic state pension or increase their own state pension based on their partner's national insurance contributions.
This can happen even if their partner has not yet claimed their state pension, but is above state pension age. A spouse or civil partner may also be entitled to receive extra state pension on the death of their spouse and/or inherit any additional state pension.
IHT, spousal exemption and bypass trusts
Careful estate planning can significantly help to protect investments from IHT on death. Everyone who is UK domiciled is free from IHT up to a certain threshold which is currently £325,000. This is known as the 'nil rate band' (NRB).
Married couples and registered civil partners have an extra benefit; they can pass assets to each other during their life or on death without having to pay IHT.
If the estate is left to the surviving spouse, then no IHT is payable but it also means that they have not used any of their NRB. This could increase their IHT threshold so that their estate could be worth up to £650,000 before Inheritance Tax would be payable.
However, if the estate exceeds £650,000, then use of a bypass trust can allow pension death benefits to be protected from IHT, as it allows the trustees of the trust to make agreed payments to chosen beneficiaries.
Pension death benefits are often paid to surviving spouses because of a member nomination or expression of wish. However, if one spouse dies and everything passes to the other spouse, then that can leave the remaining spouse with an IHT liability. If both spouses die within a short period then there may be no time for any IHT planning.
Married couples or those in a civil partnership have different planning needs from those clients who are single.
Similarly, a change in marital status means that a review should take place so that clients make the best use of planning opportunities, consider equalising pension assets and maximise the use of the NRB and bypass trusts.
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