Sneaky stakeholder tax dodge? Bare bones needs fleshing

MikeAndHisLovelyPlant · 8 March 2006 at 3:16PM

Firstly, apologies if this is elsewhere - I did look and couldn't find it.

Large caveat: I'm very vague about these details but hope someone with the knowledge will pad it out.

I believe anyone under 75(?) can pay into a stakeholder pension plan. These have a maximum contribution of £3600 per annum and even non taxpayers get tax relief at 22% (ie £360 costs £2808).

If over 50, can one then retire the next day?
This would give you 25% as tax free cash (£900) plus the rest to buy a pension - however it would be too small so it could be commuted into a tax payable lump sum (£2700). For a non taxpayer this seems to work a treat - gain of £792, for a taxpayer it's only £198.

BUT

I believe the life company would have to pay you the £2700 NET of tax which would be reclaimable (for a non taxpayer and - assuming this doesn't push you into a taxable position) via a tax return (which might be toooo much of a pain).

QUESTIONS - anything you can add?
Is there any urgency to do anything before A-Day?
Would it be wise to pay £3600 on 5 April, the same on 6 April and then retre on 7 April? What are the triviality limits?
I believe you can only commute on triviality once (per lifetime :rolleyes:) - is this true?

In summary, this looks like it may be a bit of help for people who have already retired, pay no tax and are still under 75. It might be difficult to find a life company to do this (Obviously, don't tell them your plans) as they can only take 1% per annum - so in 2 days that's not a lot.

Or am I completely mistaken

Mike

dunstonh · 8 March 2006 at 3:37PM

I believe anyone under 75(?) can pay into a stakeholder pension plan. These have a maximum contribution of £3600 per annum and even non taxpayers get tax relief at 22% (ie £360 costs £2808).

£3600 is the maximum if no earned income. With many pensioners also having part time jobs or phasing down retirement, they could pay more than £3600.

If over 50, can one then retire the next day?
This would give you 25% as tax free cash (£900) plus the rest to buy a pension - however it would be too small so it could be commuted into a tax payable lump sum (£2700). For a non taxpayer this seems to work a treat - gain of £792, for a taxpayer it's only £198

There is no magic difference between being retired at 50 or 65 or 30 even. Its just a different way of receiving an income.

However, (after 6th April) you cant take the full amount as a lump sum under triviality rules unless you are aged over 60 and ALL your pensions, both past, current and future and less than 1% of the annual lifetime allowance.

MikeAndHisLovelyPlant · 8 March 2006 at 3:49PM

dunstonh wrote:

There is no magic difference between being retired at 50 or 65 or 30 even. Its just a different way of receiving an income.

Sort of, except you can't retire until you're 50 (unless you're a jockey, footballer and certain other exempt jobs - or have even these gone now?)
(You ought to know this - you claim to be an IFA

)

Yes - could be just another way of receiving income, but I'm trying to explore the lump sum options using trivial commutation and possible tax benefits.

Mike

dunstonh · 8 March 2006 at 4:45PM

Sort of, except you can't retire until you're 50 (unless you're a jockey, footballer and certain other exempt jobs - or have even these gone now?)
(You ought to know this - you claim to be an IFA )

You can retire whenever you like. Retirement doesn't mean you have to have a pension. The age 50 rule is there for the provision of personal pensions only. Retirement is the indication not to work again.

Is someone aged 30, not intending to work again but with investments providing £30k a year income, unemployed or retired? They are retired.

Yes - could be just another way of receiving income, but I'm trying to explore the lump sum options using trivial commutation and possible tax benefits.

On the rules as they current stand for A day, someone with money purchase pensions under 1% of the lifetime allowance, then investing and then commencing under triviality is currently an option allowed.

MikeAndHisLovelyPlant · 8 March 2006 at 4:57PM

dunstonh wrote:

The age 50 rule is there for the provision of personal pensions only.

Agreed, I was indeed being being sloppy.

dunstonh wrote:

On the rules as they current stand for A day, someone with money purchase pensions under 1% of the lifetime allowance, then investing and then commencing under triviality is currently an option allowed.

So - do you agree that there is a potential tax benefit that can be exploited? Can you add anything else useful?

Cheers

Mike

dunstonh · 8 March 2006 at 5:25PM

So - do you agree that there is a potential tax benefit that can be exploited? Can you add anything else useful?

Currently, there is nothing to suggest it cannot be exploited. However, the minute there is widespread exploitation, you can bet the inland revenue will close the loophole. Just as they have recently done so on tax free lump sum recycling and what they are looking into in a couple of other areas.

EdInvestor · 8 March 2006 at 8:37PM

You can't take trivial commutation pensions before the age of 60 under the new rules.

Perhaps Mike should look at "immediate vesting pensions" - they're quite a good deal.

Sneaky stakeholder tax dodge? Bare bones needs fleshing

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