Move savings to a private pension? 6.25% after tax?
alanfp
Posts: 173 Forumite
I've been reading with interest (no pun intended) articles about the proposed flexibility regarding taking private pensions (and not having to take an annuity from April 2015)
All figures approximate, but I'd like to check my theory...
I am 55yrs old
I earn £40k pa
I have £20k in savings
I am 55yrs old
I earn £40k pa
I have £20k in savings
Here's my cunning plan, based on my understanding of the 'new' pension rules from April 2015.
Pay £20k into a private pension (investing in a cash deposit fund)
Pension pot becomes £20k/80%=£25k
As soon as it is in place, I 'cash it in', taking 25% tax-free, i.e. £6,250
The remaining £18,750, I take as taxed income, netting me £15,000 (i.e. 80% of £18,750)
Pension pot becomes £20k/80%=£25k
As soon as it is in place, I 'cash it in', taking 25% tax-free, i.e. £6,250
The remaining £18,750, I take as taxed income, netting me £15,000 (i.e. 80% of £18,750)
Total net proceeds:£21,250 , which is an effective return of
6.25% AFTER TAX
I repeat this every year and I always have access to my cash (apart from the couple of weeks it might take to organise the paperwork)
If I were a higher rate tax payer, the return would be more, I think:-
Pay £20k into a private pension, investing in a cash deposit fund
Pension pot becomes £20k/60%=£33.333k
As soon as it is in place, I 'cash it in', taking 25% tax-free, i.e. £8,333
The remaining £25000, I take as taxed income, netting me £15,000
net proceeds £23,333 i.e. Net gain
Pension pot becomes £20k/60%=£33.333k
As soon as it is in place, I 'cash it in', taking 25% tax-free, i.e. £8,333
The remaining £25000, I take as taxed income, netting me £15,000
net proceeds £23,333 i.e. Net gain
16.6% AFTER TAX
Am I missing something here, or is this something that everyone should be doing if they are a taxpayer over 55 with savings ???
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Comments
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I repeat this every year
You cant.
1 - Once you have crystallised a pension, your annual allowance for investing into a pension is reduced from £40k to £10k.
2 - you run the risk of breaching recycling rules
3 - we have been advised that HMRC may start treating that as tax evasion rather than avoidance
4 - each crystallisation would reduce your lifetime allowance and could interfere with main retirement provision
Your figures are not correct either. Pension contributions are gross but paid net of basic rate tax. Higher rate tax is reclaimed via tax code. Not added to pension. The 75% remaining fund paid out is added to your income in that tax year and taxed at the appropriate rate of income tax.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
You are right you can do it once though, putting in a large lump sum (up to £40k if your earnings allow it) and then collecting on it. It's called an Immediate Vesting Personal Pension if you want to look it up.0
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Am I missing something here, or is this something that everyone should be doing if they are a taxpayer over 55 with savings ???
What you're missing is that they shouldn't be taking the money back out in such a tax inefficient way. If they wait until they are retired (hopefully before SP age!) they can get £10k PA out with zero tax, which is an even better return.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
3 - we have been advised that HMRC may start treating that as tax evasion rather than avoidance
My wife has been doing the £2880/£3600pa into her pension for many a year, and she plans to continue to do so as long as the rules allow it.
I guess she could argue around anti-recycling (evasion!) by pointing out that it was simply continuing to contribute as before?I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
My wife has been doing the £2880/£3600pa into her pension for many a year, and she plans to continue to do so as long as the rules allow it.
That is not evasion as the £3600 limit exists to allow it without proof of income or having nil income even.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
True, but the OP *does* have enough income to cover the contribution, it's just that said contribution can only be £10k.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0
This discussion has been closed.
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