The Pension Loophole article discussion

jamesd

Higher rate tax relief is available on all pension contributions where the income being used is within the higher rate tax band. That includes for what is discussed here. This is why £4,550 would get higher rate relief and £450 basic rate. Part of the income is higher rate and gets higher rate relief, part of it is basic rate and gets basic rate.

It's irrelevant whether it is the small pot pensions being discussed here, trivial pensions or taking pensions normally.

Cheshiregeoff

I understand the methodology but wonder if you could answer two questions?

1) I only have pension income and savings income and am a basic rate tax payer. Am I eligible to utilize this loophole?

2) surely the amount one receives back is subject to some charge by the pension provider as there has to be something in it for them! Any idea of their charges?

jamesd

You have no earned income so you can pay in £2880 net, £3600 gross and use the loophole for that much paid in during the year. Potential gain if the 75% part would be taxed at basic rate is £180, the tax gain on the 25% tax free when taken out.

Yes, there will be charges from the pension provider, depends on the provider. HL would charge £75. It's probably possible to find it cheaper.

The loophole is about doing the paying in and taking out in the same year. You don't have to do that. You could pay in for several years then take out the money all at once. That would get you the same gain per year of paying in if all income is above personal allowance but only one charge, so the cost per year would be lower.

You should also note that the 2014 Budget announced an increase in the amount of interest (and dividends!) that is tax free for those with pension and earned income below £15,500. The first £10,500 is personal allowance. Other pension and earned income is taxed at basic rate. If income is still below £15,500 the interest and dividend part below the £15,500 is tax free. This won't help with the pension loophole but it might decrease your tax bill.

Cheshiregeoff

Many thanks James for your response and for confirming what I thought was the position. Others may take a different view but after charges and a little of lost interest on current savings the benefit is likely to be less than£100 and is probably not worth the hassle. I also think that the loophole will be closed in the next budget so your idea of investing year by year may not work.

The savings bonus in the last budget will benefit my wife who has less than £15,500 income so we have already registered for gross interest. This change will benefit many pensioners and others and will potentially save £1000 for those with high savings interest. It is worth transferring savings to benefit from this concession.

Thanks again for your help.

Susu592

I am already drawing a pension from a pot valued over 30k, and have been reading HMRC on trivial lump sums. It seems the value of my current pension scheme will make this loop hole not applicable to me - or have I misunderstood? Anyone know more than I do on this?

jamesd

Cheshiregeoff wrote: »

I also think that the loophole will be closed in the next budget so your idea of investing year by year may not work.

That's just taking the pension normally so it's not very practical to eliminate it, though it's conceivable that the tax free portion could be reduced. The trouble with that is that it provides much of the pension gain for basic rate tax payers, so it would at a stroke eliminate much of their gains or all their past years paying in.

jamesd

Susu592 wrote: »

I am already drawing a pension from a pot valued over 30k, and have been reading HMRC on trivial lump sums. It seems the value of my current pension scheme will make this loop hole not applicable to me - or have I misunderstood? Anyone know more than I do on this?

The loophole makes no use at all of the trivial lump sum rule. It is using the small pot rule. The small pot rule completely ignores the value of all other pension pots. It just looks at the value of each personal pension pot and asks whether it is up to £10,000 or not. If it is, then the small pot rule can be used to take it.

The loophole involves paying into a pension to deliberately create one of those small pots, then using the small pot rule to take it out again.

Both trivial and small pot rules will end on 6 April 2015 because the planned rule changes will deliver the same effect.

where_are_we

I retired aged 63 in April this year with a voluntary redundancy payment of £47K of which £30K was not taxable.Does the £17K on which I have paid tax count as earned income and thus usable for this loophole? The fact that I have stopped working and then put money into this scheme is OK as long as I do it in this tax year? What company charges the cheapest fees to complete this scheme?

mackemgolf

The MSE website article The Pensions Loophole contains the following wording:
What we're calling the 'remaining sum' - ie, the taxable part of the money taken out - in the tables above also counts towards your taxable income. So three maximum lump sums will count as £22,500 of taxable income, add that to the earnings you need of at least £30,000 and it will push you over the threshold for higher-rate tax - £41,865 in 2014/15 (based on a personal allowance of £10,000. If you were born before 6 April 1948 your calculations will be different).
This means depending on any other income, just doing two small pension pots, or even one, might also push you over the limit.
Bearing in mind that for the purpose of The Pension Loophole article we are looking at the transitional rules in place only for 2014-15 tax year, surely the payment of the pension contributions will in the first place increase the amount of the basic rate band by 100% of the pension contribution so that the taking of the 75% taxable lump sum under the small pot can in no way push someone into higher tax bracket.

Riverside14

I work irregularly and so do not know what my gross income will be for the current financial year. So is the income calculation based on this financial year or last?

This problem would also apply to someone who is self employed.