Is this a pension loophole?

Savvy_amateur

I am a 55yr old married female, working part time with 3 inactive old private pensions totalling approx 20k. Can you tell me if I am correct in thinking that if start paying money into another private pension ( or one of the existing ones) that the government will contribute 25% and after April I can in theory take the money out again along with the 25% the government have contributed? If so, is there a limit on what I can put in? Sorry its a little vague.

Linton

Savvy_amateur wrote: »

I am a 55yr old married female, working part time with 3 inactive old private pensions totalling approx 20k. Can you tell me if I am correct in thinking that if start paying money into another private pension ( or one of the existing ones) that the government will contribute 25% and after April I can in theory take the money out again along with the 25% the government have contributed? If so, is there a limit on what I can put in? Sorry its a little vague.

One potential flaw in your little wheeze - 75% of the money taken from a pension is taxed as income. Your scheme would only work for the full amount if you were a non taxpayer when you took the money out of the pension.

There is a limit of what you can put in:

The lowest of:

1) Your gross income
2) £40K in a year including employers contribution
3) Enough to keep your pot below £1.25M

OR £2880 grossed up to £3600 if you are a non tax payer now

Savvy_amateur

Thank you for that. I am a non tax payer as I only earn around £8k per year. So does this mean I could pay in £8k in a lump sum and then after April take it all out including the 25% the government have contributed and pay tax at my normal rate on the total, including my income above my personal tax limit? Or would it be more benefical to do it in a different way? Sorry, if this sounds like I have no idea about these things.............But I don't

OOps. Just saw your comment regarding the £2880. so that would be my limit for the year?

xylophone

https://forums.moneysavingexpert.com/discussion/5144815

post 19

Savvy_amateur

xylophone wrote: »

https://forums.moneysavingexpert.com/discussion/5144815

post 19

Thank you for that. Can I ask if in my position I can pay £6k in a lump sum into my pension and withdraw £8k (which includes the government contribution) after the law changes to allow it later this year? or do I need to wait a year? Will the total amount then be £16k ( including my salary) and taxed at that rate? Can I only do it the once with that pension if so, could I in theory change providers in 12 months and do the same again? Hope that makes sense.

jamesd

With an £8,000 income you can make pension payments of £8,000 gross which is £6,400 net. The pension company will add the basic rate tax relief automatically, either immediately or when they get the money from HMRC towards the end of each month. You get the tax relief even if you're not paying income tax on the money.

There are annual limits of £40,000 and also a drop of that limit to £10,000 if you take out more than the 25% tax free lump sum after 6 April 2015 but given your income those won't matter to you. If you think that you might go fill time and want to preserve the higher limit you could start capped income drawdown this tax year. that will let you take out the 25% tax free lump sum plus the GAD limit amount - about 6% - of the 75% each year without triggering the reduction to £10,000.

Because there are charges for doing things it's probably best to combine all three pensions into one before taking money. For the same reason, after taking the first lot, it's probably best to pay in for two years before taking money out. Your pension contributions when you take the taxable money out will keep your income in the tax free range.

You can use the same pension to do this year after year, no need to change. You can take all of the 75% out from 6 April 2015. no need to wait a year. You can try to pay money in and take it out again as fast as possible if you like, it'll probably take a month or so in practice.

Your taxable income will be your total income minus your pension contributions. Say you pay in £6,400 each year to get £8,000 into the pension. 25% of the £8,000 will be the tax free lump sum, £2,000, leaving £6,000 taxable. Add that to your £8,000 income to get to £14,000 taxable income then deduce the £8,000 that you pay into the pension in year two. That leaves your taxable income at £6,000 so you still have no income tax to pay.

For the year when have the £20,000 to take out, £4,000 is the tax free lump sum leaving £16,000 taxable. Add to your £8,000 gross income and deduct £8,000 of pension contributions and that still leaves you paying income tax on about £6,000. Better to take out that last £6,000 over a few years so you don't pay any income tax on it.

Savvy_amateur

Very helpful. Thank you very much.