Buying pension in small pots to avoid MPAA and LTA issues

Cus

garmeg said:

Albermarle said:

garmeg said:

coyrls said:

garmeg said:

coyrls said:

If you are facing LTA issues, £30K (3 x £10K pots) is going to be neither here nor there, as your £1M+ pot could rise or fall by more than £30K in a single day.

Still useful though. PCLS of £7,500 in my pocket is better than an LTA charge of £7,500 in the Chancellor's.

Or put the money in one SIPP and time crystallisation.

No help if you have more than LTA. Three small pots gives an extra £7,500 as tax free cash (instead of the same amount taken as an LTA charge). Not to be sniffed at.

So to be clear, for a basic rate taxpayer in retirement , the actual saving is £1500? Also if you actually have less than exactly 3 X £10K small pots it would be less.

Saving is 3 x £2,500 = £7,500 as a tax free lump sum (25% of small pot is tax free, though not technically a PCLS) instead of paying the same amount as an LTA charge.

This is applicable regardless of tax rate as 25% of the small pot is tax free.

So unless I am being dumb, what you are effectively doing is raising the LTA by £30k?

garmeg

Cus said:

garmeg said:

Albermarle said:

garmeg said:

coyrls said:

garmeg said:

coyrls said:

If you are facing LTA issues, £30K (3 x £10K pots) is going to be neither here nor there, as your £1M+ pot could rise or fall by more than £30K in a single day.

Still useful though. PCLS of £7,500 in my pocket is better than an LTA charge of £7,500 in the Chancellor's.

Or put the money in one SIPP and time crystallisation.

No help if you have more than LTA. Three small pots gives an extra £7,500 as tax free cash (instead of the same amount taken as an LTA charge). Not to be sniffed at.

So to be clear, for a basic rate taxpayer in retirement , the actual saving is £1500? Also if you actually have less than exactly 3 X £10K small pots it would be less.

Saving is 3 x £2,500 = £7,500 as a tax free lump sum (25% of small pot is tax free, though not technically a PCLS) instead of paying the same amount as an LTA charge.

This is applicable regardless of tax rate as 25% of the small pot is tax free.

So unless I am being dumb, what you are effectively doing is raising the LTA by £30k?

Effectively, yes!

Edit: One (small pot) down, two to go for me!

Workerbee999

Brynsam said:

Workerbee999 said:

Wow, I have learnt so much on this site, have been following it for ages and just come across this possibility of 3x10k small pots being outside the LTA ( and any occupational ones under 10k?) 

Yes, occupational schemes (DB or DC) can count as small pots if their capital value is under the magic £10K mark - and any 'small pot' occupational schemes are in addition to being able to cash in up to 3 small pot personal pensions.

Workerbee999 said:

We have already set up a separate SiPP for OH to ensure we make use of his PA in the 5 years before he starts taking benefits, plus have planned in the £2,880 contributions. 

Not clear from the way your've phrased the above, so just checking: does he have sufficient earned income to support contributions which fully utilise his personal allowance?

Yes, both of us still working at the moment with his salary building the SIPP ( all with 40% tax relief) so that he can take out the PA and 25% tax free ( so 16;667 pa?) for 55-60 when his DB kicks in Haven’t quite worked out what the numbers need to be yet to also take advantage of the £2,880 pa, or maybe that’s irrelevant if we plan to take the PA and 25% tax free as its income? Or knock it off the amount being taken out each year so it lasts a bit longer?

Albermarle

Most of the articles on the internet refer to people using this small pots rule AFTER they have reached 100% LTA. Presumably though you can use it well in advance/in anticipation of actually using up all your LTA at some later stage ?
Also interestingly one article mentioned that HMRC were looking at this loophole as potentially aggressive tax avoidance , although the article was from a couple of years ago and nothing seems to have happened. So in theory at some point the taxman could come looking for their money back. Even though it is legal/not evasion.

Brynsam

Albermarle said:

Most of the articles on the internet refer to people using this small pots rule AFTER they have reached 100% LTA. Presumably though you can use it well in advance/in anticipation of actually using up all your LTA at some later stage ?

Yes, you can.

Albermarle said:

Also interestingly one article mentioned that HMRC were looking at this loophole as potentially aggressive tax avoidance , although the article was from a couple of years ago and nothing seems to have happened. So in theory at some point the taxman could come looking for their money back. Even though it is legal/not evasion.

A good example of why you shouldn't believe all you read. As you say, it is both legal and not tax evasion, so HMRC can look all they like.

Albermarle

Warning on advisers' use of pension tax loophole - FTAdviser.com

shinytop

Brynsam said:

Albermarle said:

Most of the articles on the internet refer to people using this small pots rule AFTER they have reached 100% LTA. Presumably though you can use it well in advance/in anticipation of actually using up all your LTA at some later stage ?

Yes, you can.

Albermarle said:

Also interestingly one article mentioned that HMRC were looking at this loophole as potentially aggressive tax avoidance , although the article was from a couple of years ago and nothing seems to have happened. So in theory at some point the taxman could come looking for their money back. Even though it is legal/not evasion.

A good example of why you shouldn't believe all you read. As you say, it is both legal and not tax evasion, so HMRC can look all they like.

I presume if HMRC were serious they'd do more than look; they'd change the law/rules.  If someone already at 100% LTA put £30k into a pension assuming it could be withdrawn outside LTA and then the rules changed, they'd be liable for an LTA charge after the appropriate BCE wouldn't they?  

Brynsam

Albermarle said:

Warning on advisers' use of pension tax loophole - FTAdviser.com

It may not be 'in the spirit' of the rules, but HMRC will have an uphill struggle to claim that overrides the actual legislation, especially where the individual was never impacted by the LTA in the first place.

Marcon

Albermarle said:

Also interestingly one article mentioned that HMRC were looking at this loophole as potentially aggressive tax avoidance , although the article was from a couple of years ago and nothing seems to have happened. So in theory at some point the taxman could come looking for their money back. Even though it is legal/not evasion.

Albermarle said:

Warning on advisers' use of pension tax loophole - FTAdviser.com

There's nothing in that article to say that HMRC are 'looking at this loophole' - it is simply speculation that they might look at it.

The article also says: 'Since 2014, investors can withdraw up to three small pensions of up to £10,000 each in their life, and these lump sums are not tested against the lifetime allowance'. That's not correct - the limit of 3 times applies only to personal pensions.

As mentioned above, there is no limit to the number of times an individual can cash in on a small pots basis where occupational schemes are concerned. Interesting that financial advisers don't seem to have cottoned on to that, especially as there is one occupational scheme readily available to anyone: NEST. No contribution charge where the funds come from a transfer in, so cheap and easy to do if you transfer in just under £10K from a personal pension and then withdraw it/re-open your NEST account and start again. And of course we have the rise and rise of master trusts, which are also classed as occupational schemes. 

garmeg said:

Cus said:

garmeg said:

Albermarle said:

garmeg said:

coyrls said:

garmeg said:

coyrls said:

If you are facing LTA issues, £30K (3 x £10K pots) is going to be neither here nor there, as your £1M+ pot could rise or fall by more than £30K in a single day.

Still useful though. PCLS of £7,500 in my pocket is better than an LTA charge of £7,500 in the Chancellor's.

Or put the money in one SIPP and time crystallisation.

No help if you have more than LTA. Three small pots gives an extra £7,500 as tax free cash (instead of the same amount taken as an LTA charge). Not to be sniffed at.

So to be clear, for a basic rate taxpayer in retirement , the actual saving is £1500? Also if you actually have less than exactly 3 X £10K small pots it would be less.

Saving is 3 x £2,500 = £7,500 as a tax free lump sum (25% of small pot is tax free, though not technically a PCLS) instead of paying the same amount as an LTA charge.

This is applicable regardless of tax rate as 25% of the small pot is tax free.

So unless I am being dumb, what you are effectively doing is raising the LTA by £30k?

Effectively, yes!

Edit: One (small pot) down, two to go for me!

Transfer your funds by tranches into NEST or a master trust, and you could raise your LTA by considerably more than £30K!

garmeg

Marcon said:

Albermarle said:

Also interestingly one article mentioned that HMRC were looking at this loophole as potentially aggressive tax avoidance , although the article was from a couple of years ago and nothing seems to have happened. So in theory at some point the taxman could come looking for their money back. Even though it is legal/not evasion.

Albermarle said:

Warning on advisers' use of pension tax loophole - FTAdviser.com

There's nothing in that article to say that HMRC are 'looking at this loophole' - it is simply speculation that they might look at it.

The article also says: 'Since 2014, investors can withdraw up to three small pensions of up to £10,000 each in their life, and these lump sums are not tested against the lifetime allowance'. That's not correct - the limit of 3 times applies only to personal pensions.

As mentioned above, there is no limit to the number of times an individual can cash in on a small pots basis where occupational schemes are concerned. Interesting that financial advisers don't seem to have cottoned on to that, especially as there is one occupational scheme readily available to anyone: NEST. No contribution charge where the funds come from a transfer in, so cheap and easy to do if you transfer in just under £10K from a personal pension and then withdraw it/re-open your NEST account and start again. And of course we have the rise and rise of master trusts, which are also classed as occupational schemes. 

garmeg said:

Cus said:

garmeg said:

Albermarle said:

garmeg said:

coyrls said:

garmeg said:

coyrls said:

If you are facing LTA issues, £30K (3 x £10K pots) is going to be neither here nor there, as your £1M+ pot could rise or fall by more than £30K in a single day.

Still useful though. PCLS of £7,500 in my pocket is better than an LTA charge of £7,500 in the Chancellor's.

Or put the money in one SIPP and time crystallisation.

No help if you have more than LTA. Three small pots gives an extra £7,500 as tax free cash (instead of the same amount taken as an LTA charge). Not to be sniffed at.

So to be clear, for a basic rate taxpayer in retirement , the actual saving is £1500? Also if you actually have less than exactly 3 X £10K small pots it would be less.

Saving is 3 x £2,500 = £7,500 as a tax free lump sum (25% of small pot is tax free, though not technically a PCLS) instead of paying the same amount as an LTA charge.

This is applicable regardless of tax rate as 25% of the small pot is tax free.

So unless I am being dumb, what you are effectively doing is raising the LTA by £30k?

Effectively, yes!

Edit: One (small pot) down, two to go for me!

Transfer your funds by tranches into NEST or a master trust, and you could raise your LTA by considerably more than £30K!

All occupational small pots need to be taken within a 12 month period. There is no time limit for personal pension small pots as long as all 3 available are taken before age 75.