Small Pensions - is it really this simple

Hal17

My wife has does not work and we want to maximise the use of her personal allowance. My wife has two small pension pots , currently worth £3,600 and £6,000. (She has other investments).

Could she pay in her annual £2,880 allowance, claim the tax relief of £720 each tax year and then before they each reach £10K in value withdraw the full amount, i.e one in one year and then the next one in the next tax year.

Under the new pension rules yesterday this seems possible and seems too good to be true. Have we understood this correctly? Many thanks.

Annie1960

Under the new rules it looks like she can withdraw up to £30k tax free as long as all her pensions added together do not exceed £30k. It used to be £18k.

Hal17

Thanks Annie I appreciate that.

But I am a little confused, I thought that she would have to pay tax on this £30K or does it work like the 25% tax free option of larger pension pots?

Linton

Hal17 wrote: »

Thanks Annie I appreciate that.

But I am a little confused, I thought that she would have to pay tax on this £30K or does it work like the 25% tax free option of larger pension pots?

You do get the 25% tax free. The remainder is treated as income and taxed the same as if it were her wages.

Hal17

Thanks Linton - could I ask you a favour and ask you to read my original post and let me know if you think this is feasible.

My thinking is if we get these two small pots up to £10K allowance using additional contributions and tax relief, she could take one in one tax year and the other in the next tax year and keep below her personal allowance.

atush

Yes, you could withdraw the full 10K (2500 tf, the 7500 tax free under the PA IF her other income from investments is below 2.5K)

And then start a new PP.

But as it stands now, you can only do this twice.

Hal17

That sounds perfect - thank you very much.

Linton

Hal17 wrote: »

Thanks Linton - could I ask you a favour and ask you to read my original post and let me know if you think this is feasible.

My thinking is if we get these two small pots up to £10K allowance using additional contributions and tax relief, she could take one in one tax year and the other in the next tax year and keep below her personal allowance.

It looks OK in line with the proposals. One detail - the extra £720 goes into her pension rather than claimed back so the pension increases by £3600/year. Another detail - she can only go round the £10K loop a maximum of three times giving a total gain of a bit less than 3X3X£720, say £6K in 8 years.

atush

3? I thought it was 2, thanks.

Linton

atush wrote: »

3? I thought it was 2, thanks.

It goes up to 3 when the limit goes up to £10K after the 27th March.

OldBeanz

The starting rate for tax is now £10.5k and on top of that she can take a 25% TFLS. So assuming no other earned income she can max out at £14k pa. From 2015 she will not need to worry about the size of the pots as she can take the pensions at will.