Can I transfer part of my retirement savings to my spouse to reduce our tax burden?

Dear reader,

Unfortunately you cannot transfer part of your provident fund or retirement annuity directly into your wife’s name on a tax-free basis, either before retirement or when you retire.

Retirement legislation does not permit retirement savings to be transferred or split between spouses during their lifetime.

Any retirement benefits you preserve or convert into a living annuity or guaranteed life annuity must remain in your own name.

If you would like your wife to receive part of these savings, you would first need to take a retirement lump sum withdrawal. This withdrawal will be taxed according to the retirement lump-sum tax table, taking into account any previous retirement lump sums you may have received.

The remaining balance can then be transferred tax-free into a living annuity or used to purchase a guaranteed life annuity. However, it must remain in your name.

The income you receive from either a living annuity or a guaranteed life annuity is taxable and will generally be subject to pay-as-you-earn (PAYE) tax.

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Depending on your and your wife’s ages, income and financial circumstances, there may be other planning opportunities worth considering.

One option may be to donate a portion of your after-tax cash lump sum you receive at retirement to your wife. Your wife could then consider how best to invest these funds based on her own circumstances and financial objectives. This may include making a contribution to a retirement annuity in her own name.

Retirement annuity contributions may qualify for a tax deduction, subject to the applicable limits. Where a contribution is not fully deductible in a particular tax year, the excess may potentially be carried forward and taken into account in future tax years or at retirement.

However, this does not mean that taking a taxable retirement lump sum simply to reinvest it into a retirement annuity will necessarily be tax efficient.

The tax payable on the initial withdrawal, your wife’s individual tax position, the potential tax benefits of any contribution, and the restrictions associated with retirement funds should all be considered before deciding whether such a strategy is appropriate.

It is also important to consider the applicable donations tax provisions.

Donations between spouses are generally exempt from donations tax, provided the relevant requirements are met.

A well-structured retirement plan should take into account your unique retirement goals, income needs and tax position, while also ensuring that your estate can be administered as efficiently as possible.

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From an estate-planning perspective, any capital remaining in a living annuity on your death is paid directly to your nominated beneficiaries and generally falls outside the deceased estate.

In contrast, the benefits payable from a guaranteed life annuity depend entirely on the options selected when the policy was purchased, such as whether a spouse’s pension, guaranteed term or capital protection was included.

A financial advisor can help you explore the most appropriate and tax efficient retirement income strategy for your circumstances, while meeting your long-term financial objectives.

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