Save, make, understand money


Retirement planning challenges and tips for mixed age couples

Paloma Kubiak
Written By:
Paloma Kubiak

The average age gap between opposite-sex couples is two-three years but many partners have a much larger age difference. What does this mean for retirement planning? Here are key points to consider.

1) Reaching state pension age (SPA) at different times

Now that SPA has been aligned for men and women, couples with an age gap will normally each reach SPA at the same age, but not at the same time. Bear in mind though, that there are also plans to increase SPA further in the future, so couples might also find that one partner gets caught by a further increase. Where mixed-age couples are looking to retire together, this discrepancy between when each partner will receive their state pension will need to be planned for.

2) Private pensions available at different times

The problem of having access to pension funds at different times also carries across to private pensions. The age at which you can normally access a private pension is known as ‘normal minimum pension age’, and is currently 55.

Some people may have pensions they’re entitled to access early under protected pre-2006 pension rules, but this is unusual. It may also be possible to access a pension before 55 if you are in poor health and have had to stop working. Otherwise, you should be cautious about adverts or offers claiming that you can access your funds before 55. While it may be an appealing offer – particularly for mixed-age couples trying to coordinate their retirements – there is a good chance it is a scam, and there could be heavy tax penalties for doing so.

Couples may also need to consider that the normal minimum pension age is also set to increase to 57 in 2028. For some couples this will mean one partner is able to access their pension at 55 in the next few years, but the second partner will have to wait an additional two years on top of the age gap before being able to access their funds.

3) Younger partner’s pension may need to last longer

Even if a mixed-age couple decide to retire at the same time and they have both reached normal minimum pension age or SPA, it’s still worth considering this effectively means the younger partner will be planning for their pension to last longer.

Statistics show that in most opposite-sex mixed-age couples it is the man who is older: a study from the Department for Work and Pensions (DWP) estimated this was the case among 84% of mixed-age couples receiving either pension credits or pensioner housing benefits.

Unfortunately, it’s also true that in many cases, women still retire with significantly smaller pensions than men. And with higher life expectancy for women, this could amount to a significant planning challenge for many couples.

4) Both partners must reach SPA before claiming Pension Credit

Before 15 May 2019, couples could choose to move from working age benefits to pension age benefits once the older partner reached SPA. Since then, both partners must reach SPA before the transition can take place. The DWP estimates this could affect 30,000 mixed-age couples in the 2020/21 tax year. Pension age benefits can be considerably higher, and the effect will be bigger for couples with a larger age gap.

5) Death benefits considerations

With defined contribution pensions there’s a lot of scope for flexible and tax-efficient planning when it comes to death benefits. Any money remaining in the pension can potentially be passed to multiple beneficiaries, who may be able to choose between different options such as taking a lump sum, or keeping the funds in a pension (normally in “beneficiaries’ drawdown”) and taking income as needed. Individuals use an ‘expression of wishes’ to tell their pension provider who they would like to receive their death benefits.

One aspect of death benefits planning that mixed age couples may wish to consider carefully is the taxation. Normally, death benefits are tax-free if the deceased was below age 75 and the benefits are paid to beneficiaries within two years. Otherwise, the beneficiaries will pay income tax on any lump sums or income payments they receive.

If a beneficiary keeps their inherited funds in beneficiaries’ drawdown and then passes away themselves, the remaining funds can be passed on again, and the tax position for the next beneficiaries could change depending on the deceased beneficiary’s situation.

As an example, partner A is 71 and Partner B is 76. Partner A dies, and partner B keeps the inherited funds in beneficiaries’ drawdown. Partner B wouldn’t pay income tax on income payments from the beneficiaries’ drawdown fund, because partner A was below age 75. However, partner B didn’t need much of the money, and most of it is still remaining when partner B dies. Partner B’s beneficiaries – the couple’s children – then have to pay income tax, because partner B died after turning 75.

If partner A had considered making an expression of wishes splitting the pension between partner B and the children to begin with, all of them could have received tax free benefits.

While many people are aware of the need to update their expressions of wishes as their personal circumstances change, mixed-age couples may wish to pay particular attention to how their ages may affect the tax position for their potential beneficiaries and consider this as part of their planning.

Jessica List is pension technical manager at Curtis Banks