The Pension Loophole article discussion

MSE_Amy

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Thanks folks ,

pjyates6500

which providers have the cheapest opening and closing charges for SIPPS

dunstonh

We have been told by our compliance company to not advise people to use the loophole. This is mainly fear of accusation of mis-sale. Something that MSE doesnt have to worry about.

Some providers have said they will not be issuing products or allow their products to be used for using the various so called loopholes either as HMRC has said that if they will close down areas of abuse.

BigSofty

The small pension rules also say:
your total pension pots under all the schemes you belong to are worth £30,000 or less

So if you have existing pension pots you need to make sure you never go over the £30K total as well as the individual £10K limit.

If you already have £30K in pension pots then I don't think you can do this.

jamesd

The new rules do not say that once you start drawing your pension you'll only be able to contribute £10,000 a year. That only happens if you draw more than the 25% tax free lump sum plus any amount that you are drawing within your current capped income drawdown limit.

It is not necessary for a higher or top rate tax payer to fill in a tax return. They can phone or write a letter to HMRC telling HMRC the gross amount paid in (after adding the 25% to give basic rate tax relief) asking HMRC to adjust their tax code. HMRC will do it within a few weeks during the current year. This means that they can get their tax relief this year from reduced tax on their existing pension or income. That can free up more money to use for this.

"you pay tax on at your tax rate" could be confusing. The amount taken out beyond the 25% tax free amount is added to normal taxable income in the year in which it is taken. That can push people into the basic, higher or top rate tax band for some of the money taken out. You explain this later but I use the alternative wording "added to your taxable income in the year in which you take it" to try to avoid this mistake.

"The rules only apply if the tax-free cash is more than 1% of the lifetime allowance (basically the total amount of cash you can whack into a pension in your lifetime) and this limit is a whopping £1.25m for 2014/15." is confusing. What is the "limit", is the 1% £1.25 million (no). 1% of £1.25 million is £12,500. Since the maximum tax free lump sum that can be taken on £30,000 paid in is £7,500 it's not possible to go over that limit using this rule. Some care is needed because it is the total of all pension commencement tax free lump sums taken in the previous twelve months including the new ones that counts as the limit. A person who is taking a pension normally might go over this limit either because they took a lump sum previously or because they do so within the next twelve months. A person who might go over the limit can reduce the chance of trouble by taking the 25% and putting it into a savings account until after all of this has been completed, so that there is less chance that HMRC might mistakenly consider it to be recycling the lump sum.

A person who is retiring soon may end up having some unused personal allowance that they can use to make more from this because some of the 75% will be tax free. They can even usefully defer claiming the state pension until a later tax year to free up more of their personal allowance and as a bonus their state pension will increase by 1% for every five weeks it's deferred, 10.4% a year. A person who has already claimed their state pension can defer once in their lifetime anyway. Deferring for higher income is best for those under 70 in good health, perhaps up to 75 depending on life expectancy. Others can take the pension in a lump sum after ending the deferring.

jamesd

BigSofty wrote: »

The small pension rules also say:
your total pension pots under all the schemes you belong to are worth £30,000 or less

You are mixing up the small pot rules and the trivial commutation rules. You can:

1. Small pot rule A: Take an unlimited number of occupational pension pots up to £10,000 each. Occupational pension pots are those you paid into via work.
2. Small pot rule B: Take up to three non-occupational pension pots up to £10,000 each.
3. Take up to £30,000 out of any number of pots if all of your remaining pots are worth less than £30,000.

In all cases you must be taking everything out of the pension pot, nothing must be left in it. In a few cases around the edge it can pay to work out how to waste money on fees or trading costs or deliberately bad investing just to get under the limit.

Someone could end up able to combine all of these to take out at least £60,000 plus an unlimited number of occupational pots worth up to £10,000 each.

It is permitted to transfer to make a pot smaller but if it is an occupational scheme you must not have transferred any money out within the previous three years.

jamesd

Capped drawdown and the £10,000 limit. Notice that even next year it is permitted to take out the whole 25% tax free lump sum and all money up to the usual GAD limit if a person commences capped drawdown before April 6 2015. A person who will want to make contributions over £10,000 could usefully start capped income drawdown before then so that they can use that extra withdrawing limit. It will allow at least 6% of the remaining pension pot to be taken each year without triggering the cap.

This is not connected to age except the need to be at least 55. A person should be sure to reinvest any lump sums taken to do this unless they will need to spend the money anyway soon.

RRatchet

I have read and more or less understood Martin's article on the loophole. However I & my OH are at the moment non-taxpayers. I may be about to come into a small inheritance. Could I use this loophole for him & myself? I quite like the idea of getting a better return on my money than currently offered by ISA's NISA's, savings accounts.

Yours R

alice_NATALIE

As non Tax Payers with no earned income you can both put in £2880, this will be topped up to £3600, making you a total of £720. However if you have earned income you can put in 80% of that even if you are not in the bracket to pay tax.

alice_NATALIE

jamesd wrote: »

The new rules do not say that once you start drawing your pension you'll only be able to contribute £10,000 a year. That only happens if you draw more than the 25% tax free lump sum plus any amount that you are drawing within your current capped income drawdown limit.


This sound like you can withdraw and put back in gaining a further 25% ?
Say you had £100,000 in a Sipp
withdraw £20,000, free of Tax
Put £20,000 back in and gain the top up again
per the new rules is this correct?

jamesd

With £100,000 in a SIPP a person who is at least 55 years old could:

1. Take out a 25% tax free lump sum of £25,000.

2. Enter capped income drawdown before April 6 2015 and get a GAD limit calculated. Using the August 2014 gilt yield of 3% the limit for some sample ages would be:

Age 55: 7.20%
Age 60: 7.95%
Age 65: 8.85%
Age 70: 10.355
Age 85 (the maximum): 22.05%

So this year the person could in addition take out an extra 7.20% to 22.05% within their GAD limit, taxable.

3. Next year and all future years continue to take out an extra 7.20% to 22.05% depending on age without being subject to the £10,000 cap as long as they do not go over that limit.

So a total of at least £25,000 tax free plus £5,400 taxable could be taken out this year, more depending on age.

Once you have withdrawn the money you can do whatever you like with it but you must be aware of the limits on pension lump sum recycling. The MSE article gave the simplest of the limits, the 12% within a moving 1 month window rule but there are others. The £25,000 lump sum would be above the 1% limit of £12,500 so it would be necessary not to recycle the lump sum or to ensure that you do not meet one of the other requirements for it to not be permitted.

Also note that the death benefits change when you take money out of a pension pot. Until you do that the whole pension pot can be inherited by anyone tax free. After you have done it a spouse or extremely limited range of financial dependants can get it tax free into a pension pot of their own or anyone can get it outside a pension subject to a 55% tax charge. The government has announced that it plans to reduce this charge. Because of this, if it is intended that it not go into the pension pot of a spouse, term life insurance or other steps should be taken to meet the inheritance targets you have. Term life insurance is usually very cheap for those in normal good health who are under about age 75 or so.

As well as that death benefit case there is a removal of the right to a serious ill health lump sum that a person who is diagnosed as having a life expectancy of less than a year can get. This is the whole pension pot paid out tax free. The change to rules next year will let anyone get at the whole pot but 75% of it would be taxed, unlike this version.

This isn't the trick that the MSE article is about. It's been possible for quite a while and until the recent deduction in the amount that could be paid into a pension each year from over £200,000 to just £40,000 it would have let the wealthy with sufficiently high incomes make quite a lot of money from recycling. The annual contribution limit greatly limits the scope for it, to the point that I'm not sure the lump sum recycling rule needs to exist any more.