The Pension Loophole article discussion

dunstonh

berbatov10 wrote: »

Guys i have read this all with great interest as it links into a post I have asked about pensions. I meet the criteria to do it but one question about withdrawing 25% do you not have to be 55 or over??

Pensions are not accessible until age 55 at the earliest (exceptions do apply but they wont in the case of this thread subject).

berbatov10

So it doesnt really work for those under the tender age of 55

dunstonh

berbatov10 wrote: »

So it doesnt really work for those under the tender age of 55

No. A pension is for retirement. Hence why it is called pension.

Tipper

Last December I was reassured by dunstonh's sensible advice and settled down to wait for the new tax year.

dunstonh wrote: »

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.

A couple of weeks ago with the new tax year approaching I thought there was nothing to lose and I filled in another form to take my SIPP, around £9,999, as a lump sum under the small benefits rules. This time I succeeded, there is now a credit of around £8,499 in my nominated bank account. Thanks guys.

flobbalobbalob

"Update 6 April 2015: As of yesterday, this loophole no longer works, so don't try to act on it. We've left this guide here as archived information only."

Is all this forum discussion now irrelevant ?

I find myself retired at 62 with no income, but with savings and a £75k stakeholder pension with Virgin. All savings are in my wife's name who is also a non taxpayer

Virgin does not allow partial withdrawals but Scottish Widows Stakeholder appears to with no charges.

Could I not transfer my pension to a Scottish Widows stakeholder and top up with £2888 per year.

I could withdraw £14133 tax free this year (personal allowance + 25%) to give me an extra 'income' of £2120 tax saving.

I could do this for 3 years until my state pension kicks in and makes me a taxpayer or in fact defer my state pension until I get my whole pension fund out tax free.

If all this makes sense I am still using the loophole for the £2888 contributions and without opening a SIPP which to be honest I don't understand.

jamesd

The loophole no longer works because it's been replaced by standard rules that are better than the loophole was.

Any UK resident from age 55 can now pay at least £2880 net into a pension, get it grossed up to £3600 then take out the money with 25% of the amount taken out tax free.

Yes, you can transfer. Just transfer to any place that allows flexi-access drawdown to give you total control of how much of the taxable part you take. Uncrystallised funds pension lump sums (UFPLS) are a fixed 25% tax free and 75% taxed while flexi-access lets you take the 25% up front from the lot and just as much as you want from the taxable part. So you'd take the whole 25% then taxable up to your personal allowance each year from the remainder. You can reinvest the lump sum into S&S ISA and pension contributions (assuming you're restricted to 2880 net/3600 gross, if you're not ask about recycling rules).

A SIPP is just a personal pension that usually has more investment and withdrawing options. You don't have to use the more fancy features and investments if you don't want to.

Your plan makes sense, particularly the deferring part.

flobbalobbalob

Thanks for that Jamesd

I'm very cautious so a bit afraid of incurring charges in a SIPP. My pension is in Gilts and Bonds.

A stakeholder has a fixed charge of 1%, but the SIPP has bid/offer spreads. I was assuming that just transferring into a SIP would cost say 5% and another 5% to withdraw plus dealing and other charges.

I've got the whole financial year to research the costs though.

I'm happy with my pension performance but the extra £2120 waiting for my taking can't be ignored.

jamesd

A stakeholder pension will also have bid-offer spreads or the tunnel equivalent that is used for OEICs.

If you're content to pay 0.45% platform fee you might be able to get lower total cost from some of the SIPP places. Whether that combination of platform charge and non-commission fund cost is more or less than 1% will depend on the funds you choose. Hargreaves Lansdown is one place that has no charge for taking drawdown income or lump sums provided you keep at least £1,000 in your drawdown pension pot for the first year. There wouldn't be a charge to transfer in and the dealing costs for funds would be just the spread, except for a very few with only a partially reduced initial charge. They'd usually pay you some small amount to transfer in, call them to ask if you're curious how much.

Gilts and bonds worry me at the moment unless they are short-dated (little time to maturity). There are serious concerns about liquidity in the market if values fall when interest rates rise, causing a stampede to get out. So there are plans for restrictions on withdrawing money among other things if this happens. It's usually possible to find out the average maturity of a fund. That will tell you something about how badly interest rate changes might affect the capital value and how much is in short-dated bonds that can be sold or just held to maturity to pay out money.

Medosh

I am not sure if anyone is still following this thread, or still has an interest it, but thought I would relate my experiences.
Back in August 14, I took some reassurances from jamesd, among others, and went for the Small Pots scheme as an basic income tax paying 61 yearold.
Only did some less than thorough research on SIPP providers, as my own broker HL would not let me open a second SIPP and my existing HL SIPP exceeded the 10K limit.
So, took advice from here on who to avoid on charges and went first for Close Brothers. Great start and experience on-line. They took my 8k on-line, charged me £50 + VAT and handed me back £9942 (Yes tax free plus a tiny interest payment).
Second, went for Motley Fool SIPP and posted them 8k. Only a little messy as they changed 'administrators' part way through, but they charged a reasonable £75 + VAT, took the 20% tax on the taxable part and I got back £7,911, gaining about £400 (when I ignore the potential loss of interest that my 8k would have earned in a savings account over the 8/9 weeks). I updated the Tax Office, as advised here, each time I made my deposits and when I got the tax-free payout from Close Bros.
But the third Small Pot was, and still is, the most 'interesting'!
Fidelity Investments offered an online SIPP, with attractive features and no obvious big charges. Again I added 8k online and sat back to await my HMRC tax rebate of 2k. Quickly, my 8k earned a little interest, and then a little more and then finally HMRC sent their 2k. So now I had £10,002 in my Fidelity SIPP, I requested they take their charges and send me on my lump sum(s) taxed or untaxed. Politely I was told there were NO CHARGES and that my SIPP exceeded the 10K Small Pots limit. Not entirely unexpectedly, no helpful advice was offered. No wonder I could not quite recognise charge levels in the literature. But still being very early March I knew I could 'lose' a little money from the SIPP, surely? I could easily buy from a very extensive range of funds, Fidelity as well as many from other top investment managers. [SIPP has no shares or Investment Trusts with Buy/Sell spreads or charges] But all funds had ZERO buy and sell charges as a special offer for the first year of the SIPP, so buying and selling their standard FTSE tracker for a couple of days only increased my SIPP by several pounds. But Gilts had been gradually falling everywhere for many months. Bought some of their UK Gilt fund. Rose £40 in a few days. Bought Emerging Markets fund. Late March must have seen their only rise this year! Everything I bought to loose went the other way and at £10,350 I had to abandon the plan to cash my third Small Pot Fidelity SIPP before 4 April.
I have now a certain confidence in the quality of this Fidelity SIPP and am fairly relaxed about keeping the investments I have in it.
Does any of our experts on this thread have advice for getting the best out of cashing in this SIPP, considering I will be retiring in the next couple of years, hopefully with a basic tax rate Final Salary Pension, modest Lump Sum and one other SIPP?