The Pension Loophole article discussion

jamesd

Did you invest the money inside the pension? If so, that may be why it is now over £10,000. What is the current value and how is the money invested inside the pension?

If your pension charges for things like buying and selling shares you may be able to do some buying and selling to spend money to reduce the value to below £10,000.

dunstonh

Tipper wrote: »

I was wondering if someone could suggest a way out of the MSE pension loophole for me.

I opened my SIPP in August with £8,000 and the tax relief of £2,000 was added in October. When I sent in my request that I would like to take my pension as a lump sum under the government's triviality 'small pots pension benefits' allowance, they wrote back saying that my estimated total benefits are greater than the current small benefits limit of £10,000 and that therefore this option is not available to me.

Even if you put the money in a cash account you would have got interest. So, by putting in £10k, you were always going to break the small pots rule.

If you have no other pensions (either in payment or yet to be taken) then you could use triviality. If you do not qualify for triviality then wait until the new tax year and take it all then as triviality and small pots wont effectively apply any more.

johnfthetraveller

Tipper wrote: »

When I sent in my request that I would like to take my pension as a lump sum under the government's triviality 'small pots pension benefits' allowance, they wrote back saying that my estimated total benefits are greater than the current small benefits limit of £10,000 and that therefore this option is not available to me.

Have you established by how much the pot exceeds £10,000? If it is a small amount, you could ask the provider if they can suggest any admin charges they could levy to reduce it below £10,000.

Tipper

The money in the SIPP is not invested, 100% cash. The current value is around £9,999.30p. A few days after I paid in the £8,000 the SIPP provider added around 30p of interest followed by monthly service fees of around £3 and monthly interest of around £3, up to now the fees have been slightly higher than the interest. I am an active member of classic, one of the pension schemes in the Civil Service pension arrangements.

dunstonh

Tipper wrote: »

The money in the SIPP is not invested, 100% cash. The current value is around £9,999.30p. A few days after I paid in the £8,000 the SIPP provider added around 30p of interest followed by monthly service fees of around £3 and monthly interest of around £3, up to now the fees have been slightly higher than the interest. I am an active member of classic, one of the pension schemes in the Civil Service pension arrangements.

In which case, wait until the new tax year when the triviality and small pots rules wont matter with money purchase schemes.

johnfthetraveller

Tipper wrote: »

The money in the SIPP is not invested, 100% cash. The current value is around £9,999.30p.

It sounds like you should be able to draw it down as a trivial payment. Perhaps when you originally made the request it was slightly above the limit. Maybe it was after the interest payment, but before the monthly charge. Perhaps you need to speak to the scheme administrator to make sure the timing of your request is right?

Incidentally not all schemes give interest on cash, so interest may not always be something that needs allowing for.

saver861

Well I spoke to Aviva today about this, before I was aware of this thread or indeed before I was aware there was even a loophole!

I spoke to the Pensions Technical team and I did ask about charges. He outlined the charges at 0.4% annual charge by them and there would be fund charges also about 1%. In the discussion, we went through the figures, and as I am retired on occupational pension, the max I can invest is the £2,880 per year grossed up to £3,600.

My main query was to find out whether there was a minimum time for the policy to be active. It was during this discussion I then realised you could put it in and take advantage of the tax benefit. He even worked out the immediate benefits after the charges would be about £140. He did say it would be a lot of work for such a small amount and that it should be viewed as a longer term investment.

Interestingly there was no mention of any exit charges. I have since been on the Aviva website and can't find anything to suggest exit or closure charges.

I don't know if the £8,000 SIPP model works slightly different to the basic £2,880 investment model?

From my perspective I thought it was a neat little option to bang in £2,880 every year for 5 or 6 years and then draw it all in cash, albeit with 75% of the fund taxable. As I was never interested in the 'loophole' side of it, I'm wondering now whether this loophole has caused a situation that might backfire on what might have been a nice little earner, e.g removing the 25% tax free on the lump sum.

That said, if the tax relief on the investment remains, it still seems like a runner given that each year the nice taxman will be giving me £720 to invest. In addition, as I play the Credit Cards, most of the money going in each year will be free 0% Credit Card money.

What, with the generosity of the Taxman and the Credit Card folks, ones heart is filled with pure joy!!

gadgetmind

saver861 wrote: »

From my perspective I thought it was a neat little option to bang in £2,880 every year for 5 or 6 years and then draw it all in cash, albeit with 75% of the fund taxable.

My wife does this but will be able to get the whole lot tax free as she has no other pension. (Well, a few years of LGPS but worth only a few groats pa)

After retirement, she'll definitely continue with the £2880pa but it's barely worth the hassle for me as I'll only get £180 pa after tax. Her £720pa is well worth having OTOH.

dunstonh

From my perspective I thought it was a neat little option to bang in £2,880 every year for 5 or 6 years and then draw it all in cash, albeit with 75% of the fund taxable.

As mentioned on your other thread, what you propose is no loophole and the ability to contribute like that has been in place since 2001.

saver861

dunstonh wrote: »

As mentioned on your other thread, what you propose is no loophole and the ability to contribute like that has been in place since 2001.

Ah there was me thinking I was only a few months late on this .... when I'm 13 years late... lol

Anyhooo, I think the 'loophole' I'm referring to is the ability to start up the pension and withdraw it six weeks later when HMRC has added the tax benefit, i.e. as in the MSE document. I had thought that was something that had transpired recently due to changes in the budget etc?

As for the tax allowance benefit on pensions contributions, I don't see that as a 'loophole' - simply a benefit that has been in place since day one. Not sure we are getting cross wires here?

I'm seeing the benefit of this model of investment for over 55's is that we can build it up and pull it anytime we want due to being over 55 - not the quick buck as per MSE document.