Free money from the tax man - Is it possible ?

deemy2004

Okay I have a dreaded SIPP - And am a long way from retiring.

But I am wondering is the following possible ?

As an example, say I have a pension fund of £10k.

Say I take 25% as a lump sum, but then pay the £2.5k back into my pension fund, the tax man giveths me 40% so thats a contribution of £4,166 back in

Thus I now have £11,666 !

Now I take 25% of £4,166 (i.e. the new monies paid in)
and thus pay the money back in with tax relief resulting in £1736 going in and an increase in the fund to £12,361

Third time £723 in - increase of £290

Fourth time £301 in - increase of £120

So after four passes the £10k has increased to £12771 !
Money for nothing ! !!!!

Where am I going wrong ? Is THIS possible, imagien if I attempted it with £100k !!! Thats a £27k freebie !!!

Go on... burst my bubble...

EdInvestor

Hi deemy,

First of all you can't get at the 25% tax free cash until you're aged 50, shortly to go up to 55.

In order to take the TFC out you have to "take benefits" ( aka "Vest" the pension), by either converting the other 75% into an annuity (a taxed income for life) or putting it into income drawdown, where you leave the money invested and take an annual taxed income which is subject to an upper limit of approx 120% of annuity rates.

A change will occur to the income drawdown rules on A day next year, which is where this alleged "wheeze" seems to emerging from.

Previously it was a requirement to take a minimum income from your drawdown fund. That requirement has now been dropped. So some people seem to think that they can extract the TFC from the drawdown fund without officially taking benefits/vesting the pension, and that the fund now in drawdown will still be able to take contributions ( such as the TFC) and collect tax relief on them.

I suspect you will find that this is not allowed, and that if you wish to reinvest the TFC in a pension and receive tax relief, you will have to start a new pension or SIPP not put it back into the fund that has been vested.

dunstonh

You are correct and some do it once they are eligible to do so. It can boost the income signficantly if you start doing it whilst a year or two before retirement (to allow full utilisation of the earnings contribution percentage).

Pal

Post A day this should be easier. You have to take the pension from the remaining 75% at the same time, either through an annuity or drawdown, but if you have other income sources as well, there is no reason why you cannot do this - at least in theory.

You would need to draw out the tax free cash sum, pay it into a new pension policy and claim back income tax relief against your earnings that year. Your earnings would therefore need to be higher than the tax free cash sum amount in order to get tax relief on it all: a tall order perhaps?. To be most tax efficient you would need to be earning an amount in excess of the 40% tax band that is at least equivalent to the tax free cash sum amount, otherwise your tax relief on some of the contribution would be limited to basic rate tax.

In practice you could probably only do this a few times as the amounts would quickly get so small you would have problems purchasing an annuity with the remaining 75% that you could not take as cash. I guess that zero income drawdown through a SIPP might be an option for the remaining 75%? You could then recycle the money in this way until the amount in the SIPP is large enough to purchase a viable annuity (Alternatively you could continue the drawdown until your trading "skilz" have entirely wiped out its value)

In practice this is similar to using gift aid to give to charities. I have claimed back the higher rate tax on my charitable donations last year and will redonate it this year, claiming back the tax again next year....and so on.

Incidentally, some occupational schemes have rules that allow members to take their tax free cash sum on retirement while leaving their pension invested if they choose to continue working past their retirement age. This tax wheeze might be a good reason for people to do this for a year: If they were going to use a tax free cash sum to purchase an annuity anyway then this would be a clever way of boosting the amount by up to 40%.

deemy2004

EdInvestor wrote:

Hi deemy,

First of all you can't get at the 25% tax free cash until you're aged 50, shortly to go up to 55.

In order to take the TFC out you have to "take benefits" ( aka "Vest" the pension), by either converting the other 75% into an annuity (a taxed income for life) or putting it into income drawdown, where you leave the money invested and take an annual taxed income which is subject to an upper limit of approx 120% of annuity rates.

A change will occur to the income drawdown rules on A day next year, which is where this alleged "wheeze" seems to emerging from.

Previously it was a requirement to take a minimum income from your drawdown fund. That requirement has now been dropped. So some people seem to think that they can extract the TFC from the drawdown fund without officially taking benefits/vesting the pension, and that the fund now in drawdown will still be able to take contributions ( such as the TFC) and collect tax relief on them.

I suspect you will find that this is not allowed, and that if you wish to reinvest the TFC in a pension and receive tax relief, you will have to start a new pension or SIPP not put it back into the fund that has been vested.

Yes I am aware that I have to be over 50 ...

But I think your post and DH's Post confirms that IT CAN BE DONE !

For income drawdown is from the pension fund AS IS, ie. without having to liquidate assets or a change in its administration i.e. SIPPs

So I will definetly plan that come 50 or 55, I will deploy this tactic to give myself a free 27%+ boost to my pension

EdInvestor

What would you see as the big advantage, deemy?

If you do this, you can never access the capital ever again, and can only take a limited amount in income out per year, which is taxed. After you get to 75, this amount will probably go down, by order. When you die, the money has to go to charity or to other members of the pension scheme, not to your family.

Most people I know spend most of their time trying to get money OUT of pensions rather than trying to put it IN

deemy2004

EdInvestor wrote:

What would you see as the big advantage, deemy?

If you do this, you can never access the capital ever again, and can only take a limited amount in income out per year, which is taxed. After you get to 75, this amount will probably go down, by order. When you die, the money has to go to charity or to other members of the pension scheme, not to your family.

Most people I know spend most of their time trying to get money OUT of pensions rather than trying to put it IN

The big advantage is a free 27% boost to the pension pot, for both income drawdown and annuity purposes.

the aim is to maximise your pension pot, else otherwise why put money in, in the first place ?

Why put it the money in, if your not going to draw it down or get an annuity eventually ?

Afterall if you want 100% controll over your money you should put your money into the likes of ISA's first

EdInvestor

The big advantage is a free 27% boost to the pension pot, for both income drawdown and annuity purposes.

It may be tax free on the way in, but 75% of it is taxed on the way out - and you're planning to make that 100% by putting the tax free bit back in another pension.



Wouldn't it be better to put it in an ISA, so you keep it tax free, can access the capital whenever you want, take whatver income you want when you want, and pay no tax on it - or any investment gains you make on it?

This is what most people do.

The deferred tax benefit you get from a personal pension is grossly overrated IMHO when you look at the appalling restrictions placed on the money.

dunstonh

Annuity rates also tend to be higher than savings rates.

Most people I know spend most of their time trying to get money OUT of pensions rather than trying to put it IN

The only people i find like that are those that cannot sustain their lifestyle within their budget and see the pension as a way to bail them out. Before they start again and find themselves in the same situation 10 years down the road. However, thats a whole different subject. In these situations, it can be very good that they havent got access to the pension fund as they would blown it if they could get the money out and it would be those that actually do save something and not overspend their budget who would be bailing them out with pension credits etc.

EdInvestor

Nah, not the same group DH. Quite a bit richer than that

deemy2004

Pal wrote:

(Alternatively you could continue the drawdown until your trading "skilz" have entirely wiped out its value)

.

LOL...

Actually I am quite happy with myself, having liquidated 40% of my port at top notch prices including vodafone a week before it tanked 15% ! .. now I'm sniffing around for a re-entry, not yet perhaps at around 120