Trivial pension as an investment

dwileflunker

Hi,

I wonder if anyone can help. I recently was refunded a lump sum for a small company pension I had taken out many years ago. I was informed that because the value was below £15000 it was classed as a trivial pension and could be repaid as a tax free lump sum and not as a pension. It got me thinking. My wife has no pension and no income. Could we take out a stakeholder pension and get the government to put in the tax each year. Run the pension for a few years untill the value was just under the £15000 mark and then cash it in as a trivial pension and take the tax free lump sum(my wife would be old enough to start taking a pension). The return of 22% tax plus any returns the plan gave would be a brilliant investment. I currently draw a company pension after taking early retirement (I'm 58), could I also do the same and take out a stakeholder pension and get the same return? It all sounds too good to be true so I'm sure there must be a problem but I'd appreciate some advice from someone who knows a bit more about it than I do.

Milarky

Your plan may work with your wife (whom you say has no pension) but probably won't with you because the TP rules must take account of all non-state pension assets up to the limit of £15,000 (in 2006/07). For occupational pensions the mulitplier is either 20 or 25 - so that any pension in payment of £600pa or more would be enough to remove this option.

The way it 'should' be exploited therefore is to start out with no pension rights at all, save into a pension vehicle up to the required qualifying age (50 currently, rising to 55 in 2010, I think), exercise the TP cash option (a once-only consession) and then start savings from 'scratch' - this time as a 'pension-proper'.

On the tax-free side, no you don't get it all tax free - just the 25% less the tax relief on the 75%. Thus you would get more out than was put in but not much - 22% of 75% is 16.5%. 83.5% of £15,000 is £12,525 which would have cost £11,700 at basic rate relief to create. The 'uplift' benefit is therefore from £11,700 to £12,525. I think that the 'tax' on the TP sum is based on annual income, so if that was the only income in that year it would not all be at 22% (But you'd need to check that).

This ignores charges of operating a pension plan of course but then it also ignores the potential investment returns - it is a 'like-for-like' comparision based on the tax advantages. Remember, too that the TP figure should rise in line with the cap and will increase by £1000 per year until £2009 at least.

[Take a look at these also: http://forums.moneysavingexpert.com/showpost.html?p=646659 and http://forums.moneysavingexpert.com/showpost.html?p=646735 you'll see it says that TP can only be taken after 60, not 50 or 55!]

EdInvestor

TPs minimum age will rise from 50 to 60.

The tax relief will be clawed back on 75% of the money, so it's not really a mighty gain.At least you don't lose access to the capital, so in that respect it's better than most pensions

dwileflunker

Hi,

Many thanks for the advice. I thought it wouldn't be quite so simple but thanks anyway.