Buying pension in small pots to avoid MPAA and LTA issues

Marcon

garmeg said:

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.

The 12 month period applies to trivial commutation, not small pots. To trivially commute, the value of all the member's pension entitlements cannot exceed £30,000 on the nominated date, which is any date within 3 months of the start of the 12 month commutation period. 

Small pots are valued individually at the time they are accessed, so do not have to be taken within a 12 month period, whether they arise from an occupational arrangement or a personal pension.

garmeg

Marcon said:

garmeg said:

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.

The 12 month period applies to trivial commutation, not small pots. To trivially commute, the value of all the member's pension entitlements cannot exceed £30,000 on the nominated date, which is any date within 3 months of the start of the 12 month commutation period. 

Small pots are valued individually at the time they are accessed, so do not have to be taken within a 12 month period, whether they arise from an occupational arrangement or a personal pension.

Thanks. Just opened a NEST account as a self employed person, even though I am not one. Just in case, I may not bother with this. Can you simply close and reopen a NEST account at will? Seems too good to be true really.

EDIT: Asks for approx transfer value. If I ask for £10,000 to be transferred in but I had £100,000 in my SIPP I wonder how much would be transferred across because they dont specify partial transfer as an option.

jamesd

For occupational only, note this additional constraint:

"in the 3 years before the day the small lump sum is to be paid out, there have been no recognised transfers-out relating to the member, from either:

• the scheme paying the small lump sum, nor from
• any ‘related scheme’ (which in this case includes both occupational pension schemes and public service pension schemes - so long as they are registered pension schemes relating to the same employment as the paying scheme)."

This doesn't apply to ordinary personal pensions like non-workplace HL.

jamesd

Albermarle said:
I will now think about opening up a couple of smaller pensions in addition to my main ones as LTA is a future possibility.

For the 3 per lifetime ordinary personal pensions there's no need, you can use one and split at your convenience.

For occupational the 3 year since last transfer out rule can make separate occupational pots kept well below 10k to allow for growth a better choice. Splitting within the scheme as HL do doesn't help with these since it's per scheme, while non-occupational are per "arrangement" (sub-pot).

garmeg

jamesd said:

Albermarle said:
I will now think about opening up a couple of smaller pensions in addition to my main ones as LTA is a future possibility.

For the 3 per lifetime ordinary personal pensions there's no need, you can use one and split at your convenience.

For occupational the 3 year since last transfer out rule can make separate occupational pots kept well below 10k to allow for growth a better choice. Splitting within the scheme as HL do doesn't help with these since it's per scheme, while non-occupational are per "arrangement" (sub-pot).

So transferring £10,000 to NEST and invest in a cash fund, taking a £10,000 small pot, closing the account, reopen account, rinse and repeat seems to be a genuine loophole easy to take advantage of?

Do they levy the 1.8% contribution charge on transfers in?

EDIT: Seems not - "Remember that we don’t charge for transfers into Nest – we’ll only charge the 0.3 per cent standard annual management charge on your transfer once it becomes part of your overall pension pot."

jamesd

garmeg said:So transferring £10,000 to NEST and invest in a cash fund, taking a £10,000 small pot, closing the account, reopen account, rinse and repeat seems to be a genuine loophole easy to take advantage of?

Not quite. It appears to be an invitation for NEST to make a possible aggressive tax avoidance report to HMRC and refuse to do future business with you. For HMRC it appears  to invite use of the general anti-avoidance rule.

garmeg

jamesd said:

garmeg said:So transferring £10,000 to NEST and invest in a cash fund, taking a £10,000 small pot, closing the account, reopen account, rinse and repeat seems to be a genuine loophole easy to take advantage of?

Not quite. It appears to be an invitation for NEST to make a possible tax avoidance report to HMRC and refuse to do future business with you. For HMRC it appears  to invite use of the general anti-avoidance rule.

Seemed too good to be true. Could probably get away with doing it once though to get 4 small pots instead of 3. Not worth the bother really.

Albermarle

For the 3 per lifetime ordinary personal pensions there's no need, you can use one and split at your convenience.

I thought only HL will do this 'splitting' for you, and other providers do not seem to offer this service ?( I am not with HL)

In any case for new contributions , it might be just as easy to open up a new pension and deposit around £8K ( or a bit less to allow for some growth if not kept as cash ) ?

Dazed_and_C0nfused

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?

I've read that differently.  I think the op means OH is contributing £2,880 now so that they can take the income without having tax to pay in the years before State Pension kicks by using otherwise unused Personal Allowance.

Hopefully the op will clarify this.

Brynsam

garmeg said:

There is no time limit for personal pension small pots as long as all 3 available are taken before age 75.

Small pot personal pensions don't have to be taken before age 75.

jamesd said:

garmeg said:So transferring £10,000 to NEST and invest in a cash fund, taking a £10,000 small pot, closing the account, reopen account, rinse and repeat seems to be a genuine loophole easy to take advantage of?

Not quite. It appears to be an invitation for NEST to make a possible aggressive tax avoidance report to HMRC and refuse to do future business with you. For HMRC it appears  to invite use of the general anti-avoidance rule.

Although if you take advantage of NEST's upper age limit of 105(!), and spread out the withdrawals, rather unlikely anyone would spot it.