It may sound odd to hear this from financial planners, but the most important person you can talk to when it comes to your finances is your spouse or partner. Yes, they’re even more important than us!
If you’re married or in a long-term relationship, financial planning should very much be a joint effort.
Not only can planning together increase your chances of financial success, but there are also several financial advantages you can gain by planning your finances as a couple. Read on to find out more.
1. Joint decisions are usually better decisions
According to a 2020 survey by Artemis Strategy Group, nearly 3 out of every 4 people have a different money management style than their partner. Half of people say financial issues cause most stress in their lives.
Given those figures it’s important that, when it comes to your overall financial strategy, you should ensure you both participate in the decision-making if you’re married or in a long-term relationship.
“Two heads are better than one” really does apply. Decisions you make as a partnership will usually be better than individual ones, and you’ll both be invested in the outcome.
It’s understandable if one of you will take the lead when it comes to managing your everyday finances such as paying bills, managing bank and savings accounts, and keeping a track on your outgoings.
But, even if this is the case, by communicating and working together you’ll strengthen both your relationship and your finances.
2. You can make the most of the pension tax relief that is available
The tax relief provided by the government make pension contributions an incredibly tax-efficient way to save for your retirement. Your Annual Allowance means that, in 2021/22, you can save up to £40,000 (or 100% of your earnings if lower) into a pension tax-efficiently.
You’ll receive basic-rate tax relief on your contributions, meaning a £100 contribution only costs you £80. You’ll also benefit from additional relief at your marginal tax rate if applicable.
Because of the higher rates of relief, it can make sound financial sense to maximise contributions for the higher earner in any couple.
Also remember that, even if you’re not working, you can still contribute to a pension and benefit from basic-rate tax relief on your contributions. You can pay up to £2,880 into a pension each year and this will be topped up with basic-rate tax relief to £3,600.
3. It can help you maximise your tax-efficient savings
In addition to the tax relief you get on pension contributions, saving money into an Individual Savings Account (ISA) also has tax advantages.
If you’re over 18 you have an annual an ISA allowance of £20,000 in each of the 2021/22 and 2022/23 tax years regardless of how much you earn.
This means you and your partner can save £40,000 tax-efficiently each year – and neither of you will pay Income Tax or Capital Gains Tax when you draw money out of your ISA.
4. A joint income strategy in retirement can be advantageous
As well as making it highly advantageous to save money, financial planning as a couple also has advantages when it comes to taking income when you retire.
Various tax allowances create plenty of opportunities if you plan together.
For example, both of you will get a Personal Allowance in each tax year. In 2021/22 tax year this is £12,570. This means that you get a joint tax-free income of more than £25,000.
On top of that, if you’re married or in a civil partnership it can sometimes be advantageous to claim the Marriage Allowance allowing you to transfer £1,260 of your Personal Allowance to your partner.
If you’re both drawing income from pension arrangements, you should also look to limit the amount of tax you’ll be paying by maximising your respective 20% tax bands. In 2021/22 you only start paying higher-rate tax when you’re earning more than £50,270 so you could effectively put together an income strategy that will provide £100,000 between you and only pay tax on it at 20%.
5. You can maximise your tax-free investment income
Regardless of your earnings, individuals have a Capital Gains Tax (CGT) allowance. In the 2021/22 tax year this is £12,300.
By working together with your spouse or partner, you can take a combined income of £24,600 from your investments free from CGT.
This amount is on top of any investments you have in tax-efficient vehicles such as pensions and ISAs.
6. Frozen tax allowances make it even more important to plan as a couple
In his March 2021 Budget statement, the chancellor announced that all the allowances you’ve read about here will be frozen until the 2025/26 tax year.
Rising inflation effectively reduces the real value of your allowances each year.
With inflation predicted to reach 7% this year, it makes it more important than ever to plan your finances as a couple and maximise your combined allowances as much as you can.
7. Planning as a couple can help you achieve your life goals
By planning your finances together, with both of you understanding your joint financial position, you can make your partnership stronger and increase the chances of both you being able to do what you want to do.
Working together, discussing your finances, and aligning your spending habits means you’ll be able to agree on your future plans and how you’re going to achieve them.
Get in touch
If you need help or guidance when it comes to your financial planning, we’ll be happy to help you.
You can email us at email@example.com or contact your adviser on 020 3828 8100.