The Pension Loophole article discussion

TBC15

Thanks for that. So keep putting in the gross £3600 per year ,draw out 25% + up to tax allowance, subject to HL SIPP conditions?

kidmugsy

TBC15 wrote: »

Thanks for that. So keep putting in the gross £3600 per year ,draw out 25% + up to tax allowance, subject to HL SIPP conditions?

Do it while it's still available! There's an election in May.


P.S. Is there any way that she can pay more NICs to "earn" a bigger State Pension? That might be a good investment.

TBC15

Unfortunately it was a bit late in the day when we started thinking about pensions. We have back paid as much as we can but she will still be a bit short.

anne99

Hi,

We would welcome comments or guidance re our situation.

My husband has stopped working at age 64, and we wonder if we can benefit from this loophole using a recent inheritance.

Earnings in the current tax year:
from employment: around £6k
from a pension annuity he purchased aged 60: around £1k.

Earnings in future years:
State Pension
tiny income from self-employment
£1k from pension annuity as above
Anything he chooses to crystallise from his pension pots

Pension funds not yet crystallised:
£4000 from self-employment
£170 from employer scheme (£73 personal net contribution made within this financial year)
£16,000 from previous contracted-out scheme

Capital available for investment
£20,000


I am thinking he can invest £6,000 (100% of earned income), which will be grossed up to £7,200. If he withdraws £4,000, £1000 will be tax free and the remaining £3,000 will be taxed at 0% as his total income this year stays within the personal allowance, so effectively £4,000 tax free.

His pension pot will then contain £7,200 - £4,000 = £3,200, which he could withdraw next tax year. It will have cost him £2,000 to have created this pot worth £3,200.

Any flaws, or any better suggestions, please? We have £12,000 remaining on our mortgage (2.5%), £12,000 in cash isas (2.5%) and have not contributed anything to isas this year.

(I have earned and pension income, so the above is not our only family income, in case you were worried about us. We are not likely to receive any state benefits except state pension.)

Many thanks for any assistance.

kidmugsy

anne99 wrote: »

My husband has stopped working at age 64, and we wonder if we can benefit from this loophole using a recent inheritance.

Earnings in the current tax year:
from employment: around £6k
from a pension annuity he purchased aged 60: around £1k.

Earnings in future years:
State Pension
tiny income from self-employment
£1k from pension annuity as above
Anything he chooses to crystallise from his pension pots

Pension funds not yet crystallised:
£4000 from self-employment
£170 from employer scheme (£73 personal net contribution made within this financial year)
£16,000 from previous contracted-out scheme

Capital available for investment
£20,000


I am thinking he can invest £6,000 (100% of earned income), which will be grossed up to £7,200. If he withdraws £4,000, £1000 will be tax free and the remaining £3,000 will be taxed at 0% as his total income this year stays within the personal allowance, so effectively £4,000 tax free.

His pension pot will then contain £7,200 - £4,000 = £3,200, which he could withdraw next tax year. It will have cost him £2,000 to have created this pot worth £3,200.

Seems a good idea to me. Another idea that you pair should discuss is that he might defer drawing his state pension for a couple of years, and take the reward as extra pension. That reward is at a rate of 10.4% extra pension for each year of deferral, which is a darn good return. While that deferral carries on, he can continue drawing down from his pension pots in the tax-efficient way you've just described.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

dunstonh

Any flaws, or any better suggestions, please?

He doesnt have the income to make a £7200 pension contribution.

kidmugsy

dunstonh wrote: »

He doesnt have the income to make a £7200 pension contribution.

Oops, I missed that. It'll have to be £6000 gross = £4800 net.

VivaTibet

Hi All,

I want to try and do this I am retiring next year so I thought the change from higher rate to basic rate could also be used to eek a bit more out.

I pay 40% Tax:
My plan is to put £8k in a SIPP, once it's topped up take on the 25% (2.5k) this tax year. balance to be drawn down in the new tax year When I will be retired and probably paying 20%

Now my question is will the cash flow be as follows?

£2.5k this tax year, take the rest of the pot next tax year when I should get 25% tax free (£1875) the rest taxed at 20% ([£7500-£1875]*(1-20%)=£4500) this totals £8875 and I should be still eligible for a £2000 tax rebate (will this come as a cheque?) because when I invested in the SIPP I was paying a higher rate?

My goal is to have the principle back next April with a £2k cheque coming sometime thereafter, does this make sense?

Can I do it with three SIPPs?

Is the £2k counted as income and therefore taxed?

Sorry for so many questions, thanks for help in advance :beer:

kidmugsy

VivaTibet wrote: »

I pay 40% Tax:
My plan is to put £8k in a SIPP, once it's topped up take on the 25% (2.5k) this tax year. balance to be drawn down in the new tax year When I will be retired and probably paying 20%

Your £8k will be grossed up to £10k in the SIPP. Then you ask HMRC for another £2k back from them to you. (They may well do it by changing your tax code.) Of course it's not taxed as income since it is just tax relief.

VivaTibet wrote: »

Now my question is will the cash flow be as follows?

Nope, it will be as follows.

If next year you draw down the lot, you'll get £2.5k tax-free, and the other £7.5k taxed as income. As long as your other income for the year, plus the £7.5k, still fall in the basic rate tax band, then it'll be taxed at 20%, assuming that the pension provider has been provided with a suitable tax code by HMRC.

Tipper

Over62 wrote: »

...One thing that may be relevant to those investing the maximum amount - my SIPP has earned 27p during its lifetime. If this was added to a pension pot of £10000, it would bring the total pot above the maximum for claiming, so could the company refuse to pay out?

Yes they could. Read this, 'Thank you for returning your retirement pack, indicating that you would like to take your pension as a lump sum under the government's triviality 'small pots pension benefits' allowance. Unfortunately, we note that your estimated total benefits are greater than the current small benefits limit of £10,000.00 and therefore this option is not available to you...'. Thanks MSE. Any ideas what to do next?