New Pension Rules- Opportunity for tax avoidance for better of savers

RobStaffs

Just listened to Paul Lewis interviewing David Cameron via the BBCi player. He pointed out to Cameron that the new rules would result in many wealthier individuals exploiting the new rules by simply drawing down tax free income each year and then investing similar amounts again to get the tax benefit. I could not really follow Paul's point. Could anyone expain?

Your_Hero

RobStaffs wrote: »

Just listened to Paul Lewis interviewing David Cameron via the BBCi player. He pointed out to Cameron that the new rules would result in many wealthier individuasl exploiting the new rules by simply drawing down tax free income each year and then investing similar amounts again to get the tax benefit. I could not really follow Paul's point. Could anyone expain?

As a simple example:

Personal allowance £10,000. Draw out £13,333.33.
25% is tax free = £3,333.33
75% is treated as taxable income = £10,000. This is equal to the personal allowance and therefore no tax is due (assuming no other taxable income).

Pay £2880 into a pension and it will be grossed up to £3,600. Draw this amount out tax-free next tax-year together with an adjusted amount as above and within the personal allowance. You've gained £720 in tax-relief and paid no tax.

I personally don't think this is much of an issue because it generally means living on very low income (which goes against most people's idea of retirement), and also when you factor in state pension, this will take up most of your personal allowance anyway.

Linton

The basic principle is that you put a pot of money into your pension getting tax relief and then immediately take it out again receiving a 25% tax free lump sum, the rest being taxed at presumably the same rate as the relief received. So a higher rate tax payer would make 40% of 25% = 10% on the deal. This could be repeated as often and as frequently as you want.

It sounds good but there are limitations....

1) any money paid in must be covered by earned income to get the tax relief going in. Pensions, dividends, interest and rent receipts arent "earned income". So one must be in some form of employment.

2) There is a maximum lifetime allowance of £1M for total payments into a pension

3) There is an annual pension contribution limit of £40K This limit goes down to £10K once you start withdrawing money.

So a wealthy individual could make up to £4K profit from £40K in the first year and £1K maximum annual profit from £10K in subsequent years. There is also a lifetime contribution limit of £1M.

So in practice its possible but hardly life changing for a wealthy individual. Perhaps the number of such people over 55 still working with spare Lifetime Allowance and not wanting to put a lot of extra money into their pension for retirement purposes may be limited. Such people may not want to go to the effort for a relatively small amount of extra income.

RobStaffs

Thankyou both for the explanation. Fully understand the point now. Agree on the points about a lot of effort for what could be minimal benefit.

jamesd

The main effect of the £10,000 cap is to limit those who are not wealthy. A wealthy person can just do things like increasing their mortgage or using savings to continue to put £40,000 a year into the pension without taking anything out, or just taking out the tax free lump sum. That's all it really takes, some existing money outside the pension.

It's added another reason to keep money in ISAs instead of a pension.

System

jamesd wrote: »

or using savings to continue to put £40,000 a year into the pension

You have to have earned income of at least that amount in order to get tax relief on pension contributions.

dunstonh

I could not really follow Paul's point.

Paul Lewis is not known for actually getting the point. His aiming tends to be way off the mark nowadays.

Thrugelmir

dunstonh wrote: »

Paul Lewis is not known for actually getting the point. His aiming tends to be way off the mark nowadays.

Not the programme it was.

Thrugelmir

Your_Hero wrote: »

Pay £2880 into a pension and it will be grossed up to £3,600. Draw this amount out tax-free next tax-year together with an adjusted amount as above and within the personal allowance. You've gained £720 in tax-relief and paid no tax.

What's in it for the pension provider? All this administration is going to cost money.

Your_Hero

Thrugelmir wrote: »

What's in it for the pension provider? All this administration is going to cost money.

True. I suspect each time the client draws out money like this, there will be some sort of charge similar to drawdown charges now.

Thrugelmir

Your_Hero wrote: »

True. I suspect each time the client draws out money like this, there will be some sort of charge similar to drawdown charges now.

I think that the media like many individuals are getting ahead of the realities of the new rules. April may well be a damp squib. As providers opt out of even offering products on commercial grounds initially.