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

zagfles

Linton wrote: »

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.

The lifetime allowance is £1.25M, and it's not a "contribution limit", it's a limit on the value of the pension fund(s) so includes investment growth.

Linton

zagfles wrote: »

The lifetime allowance is £1.25M, and it's not a "contribution limit", it's a limit on the value of the pension fund(s) so includes investment growth.

Thanks, my carelessness. Doesnt change the point though that a wealthy individual may be more concerned keeping the Lifetime Allowance than using some getting the odd £K in tax loopholes.