The Pension Loophole article discussion

VivaTibet

kidmugsy wrote: »

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.



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.

Hey I don't think you understood my point or I wasn't clear. I'm asking can you draw down the lot in two tax years thereby getting two lots tax free?

kidmugsy

VivaTibet wrote: »

Hey I don't think you understood my point or I wasn't clear. I'm asking can you draw down the lot in two tax years thereby getting two lots tax free?

Yes, as long as your total taxable income in each of the years is below the personal allowance.

PensionTech

I'm asking can you draw down the lot in two tax years thereby getting two lots tax free?

Not in the way you've described. I think you are mixing up the two different types of flexibility on offer from April.

The first is flexi-access drawdown. When you put your funds into drawdown, you "crystallise" them, and you can only take 25% of the value that has been crystallised as a tax-free lump sum. Even if you don't draw down any of the remaining 75% that year, you can't take any more tax-free cash from those funds. When you do draw down any of the 75%, it is taxed as income.

The second is uncrystallised funds pension lump sum (UFPLS). This is where, instead of designating your funds for drawdown, you take a lump sum of some or all of your benefits. The lump sum you receive is 25% tax free and the remaining 75% is taxed as income. You can take any number of UFPLSs from your funds until the pot runs dry, and each one is 25% tax-free and 75% taxed as income.

What I think you are describing is taking your 25% tax free initially and keeping the rest of the funds invested, like in a drawdown arrangement, and then taking UFPLSs from the remaining funds afterwards, to get 25% of each subsequent withdrawal tax-free. That isn't possible.

It is still possible that you actually won't end up paying tax on any/all of the taxable benefits (whether taken via UFPLS or flexi-access) because they're taxed as income and might fall within your personal allowance - but I don't think that's what you were talking about.

Hope this helps!

johnfthetraveller

Well I finally got my refund. Looking forward to £500 freebie from HMRC, less £150 administration charges......

£400 to close the account! They managed to find THREE sets of charges to apply.

So in order to get £100 (of my own money) from HMRC, I've taken £400 from the public purse and given it to Bestinvest. Not my idea of something to feel good about.

HL may have slightly less fees (I couldn't use them because I already had a SIPP with them), but I would question MSE's encouraging people to do this "loophole" when most of the benefit is going to the fat cats at the expense of the public purse. This is the second time recently I've found MSE flagship articles to be poorly researched and misleading. I don't think Martin's standards are being maintained by the new crew.

johnfthetraveller

So I've been having a "disagreement" with Bestinvest. If you gave 100 people the document with their charges on, I think most (if not all) would not understand that it costs £400 to close a SIPP set up for this loophole. I hope one day the mis-selling juggernaut gets round to companies like Bestinvest.

I can't imagine that a SIPP account has much more overheads than a bank current account - which banks will close for free. I'd like to hear how Bestinvest justify taking £400.

gadgetmind

Which fees make up that £400?

£150 trivial payment charge, £125 to close account and what else?

greenglide

.... and presumably these fees were present when the account was opened.

Some providers have these charges, some don't.

I presume you did agree to this when you opened the account?

gadgetmind

greenglide wrote: »

.... and presumably these fees were present when the account was opened.

It's hard to figure out exactly which fees cover this particular case.

johnfthetraveller

gadgetmind wrote: »

Which fees make up that £400?

£150 trivial payment charge, £125 to close account and what else?

£180 Trivial payment
£150 Account closure
£100 Annual charge for income payments (after tax-free cash)

Actually they forgot to charge the £30 VAT on the Trivial Payment, so officially they charge £430!

johnfthetraveller

greenglide wrote: »

I presume you did agree to this when you opened the account?

All the charges are listed in their charges document, but as I said, I don't believe any untrained person would be able to deduce what they would be for this particular scenario based on that document alone.