Pension Triviality Rules - How to Make Money!

Paul_Varjak

In April 2006 the Government is introducing new rules allowing those aged 60-75 to cash in Pension Funds if the total value of all Pension funds (including those in payment) is less than £15,000.

In this case, the entire value may be taken in a cash sum. 25% of this will be tax-free, the remainder taxable at whatever your tax rate is:

Case Study
Martin Lewis is aged 59 and a Higher Rate Taxpayer. He has no pension, but currently earns enough to allow him to make full use of the Pension Triviality Rules.

Martin pays £11,7000 into a Pension fund which, when automatically grossed up with a 22% tax rebate, is worth £15,000. After submitting his tax return, Martin gets a further 18% rebate of Income Tax totaling £2,700. This means the real cost of the £15,000 pension is just £9,000!

After retirement, Martin becomes a Basic Rate Taxpayer and decides to cash in his pension using the new triviality rules. The pension pot (after charges) remains at £15,000 and so he receives:

£3,750 (25% tax-free cash)
£8,775 (£11,250 less 22% Income Tax)

So, in total, Martin receives £12,525 even though he paid just £9,000!

Pal

A profit of £3,525 which, combined with his pitiful state pensions, he has to live on for the rest of his life.

This is a last resort loophole that will be available only to those who are presumably relatively poor (having failed to save for their retirement and being 22% taxpayers) but who happen to have £9,000 lying around that they can pay into a pension fund.

Paul_Varjak

Pal:

I realise it is a contrived example to show the maximum possible gain! It is even more contrived than you think, as the example is for higher rate taxpayers not basic rate taxpayers as you suggest!

cheerfulcat

I was thinking along the same lines. It's not necessarily for the relatively poor - it could be very useful for anyone who has not worked in pensionable employment. Since personal pensions have only recently become available to non-earners, it would be perfectly possible for example for a well off man to make the contributions to a pension on his wife's behalf and do exactly what Paul Varjak suggests.

Pal

My point is that someone who has failed to save at all for their retirement is unlikely to have £9k kicking around to put into a pension scheme at the last minute in the hope of making a few thousand in profit, irrespective of what income tax bracket they are in. The only place where this makes sense as a long term suggestion is where people have saved for their retirement through other means (e.g. property or ISAs), who may stand to make a few thousand this way.

Occasionally someone will find themselves in this position and may find it useful, however I wouldn't recommend it as a moneymaking strategy for the vast majority of people.

Paul_Varjak

cheerfulcat wrote:

I was thinking along the same lines. It's not necessarily for the relatively poor - it could be very useful for anyone who has not worked in pensionable employment. Since personal pensions have only recently become available to non-earners, it would be perfectly possible for example for a well off man to make the contributions to a pension on his wife's behalf and do exactly what Paul Varjak suggests.

Non-earners (especially non-taxpayers) can also benefit as well. Of course that may also seem a little contrived as the non-taxpayer would also have to pay £11,700 into the Pension Fund!

However, I have been a non-earner and non-taxpayer for many years and have no pension pot but have just inherited some money. But I am limited to putting in £2808 each year (£3,600 when grossed up). So it will take a while to build up the £15,000 in a pension pot to make use of these new rules!

dunstonh

By 2010, the allowance will be £18,000.

It can be used and indeed is already being used to gain tax relief and full lump sum. I have already stuck some £2808's in for clients with no previous pension arrangements.

Its not going to be widespread or mainstream but its available to some so why not use it.

Paul_Varjak

dunstonh wrote:

By 2010, the allowance will be £18,000.

It can be used and indeed is already being used to gain tax relief and full lump sum. I have already stuck some £2808's in for clients with no previous pension arrangements.

Its not going to be widespread or mainstream but its available to some so why not use it.

But I think the Triviality rules themselves do not come into effect until April 2006. But you can anticipate their use now by putting money in now!

I only started looking at pensions on Sunday and Hargreaves Landsdown sent me details on SIPPS today, which included details of the triviality rules.

The question I have is: Can I get a pension now, cash-in the entire pension pot on, say, April 6, 2006 (assuming I was 60 by then) and then use that money to buy another pension (with all the tax-saving benefits) and keep doing this until I am 75?

Are the triviality rules just a one-off benefit?

dunstonh

Triviality already exists. Where the income from the pension would be under £260 a year, the full value of the fund can be paid. It is moving to a capital value of 1% of the lifetime allowance from 2006.

You can plan now to take advantage of it. Indeed, you still have 2 tax years before the changes come in. In fact, doing it now, means you can take advantage of three tax years in 2 years 1 month and write cheques totalling £8424. Then in April 2006 (or May for good measure) you can withdraw £10800 plus any growth on the fund. Put the pension in fixed interest/gilts/commercial property and that way you dont have to worry about stockmarket volatility. There is a risk. If the Govt changes it's mind (unlikely at this stage) or the growth on the pension funds takes you above the lifetime limit (unlikely if you choose low risk funds).

One thing to note is that it is your lifetime allowance on your lifetime pensions. Once you have used your 1%, then it is all over. The loophole of 1% every time was closed when the finance bill was passed in July last year. Initially it was going to be 1% of every pension allowing repeat investing or spreading the money across providers. However, evidence that it would be abused became apparrant when comments like "every individual should set up a bespoke triviality fund" began to appear on pension websites.

Paul_Varjak

Dunstonh:

I assume you are talking about 'carry back' rules that I have only read about in last two days. What I have read of the 'carry back rules' you have to add to the pension 'pot' before January 31st in order to 'carry back' to previous year. Is that correct?

So, you mean that the 1% lifetime allowance is £15,000 - 1% of 1.5 miliion pounds - the maximum you can put in a pension?

dunstonh

Nope, nothing to do with carryback.

You have the current tax year and the next two to make contributions ready for the new rules.

Yes on the lifetime allowance 1% for triviality