Buying pension in small pots to avoid MPAA and LTA issues

garmeg

mark55man said:

So if you are "technically" self employed in that you have filled in the right forms etc, but are "playing" at it.  eg selling odd bits of craft, or making a little money from photos - in that case is it a crime to claim you are self employed and earn the benefits in terms of NI contributions.

I think it would be a pretty harsh system that punished that, and even though I think its morally wrong I doubt it could be made legally wrong.  Why don't more people do this - well I think its that most people can't afford to "play" at earning an income and therefore are earning credits in their own right.
 

An early retired teacher has told me hi is paying SE NI for a complete state pension instead of the normal variety. He only has a teacher pension as an income, not actually doing any self employment. Presumably just completing a nil return - I did not ask him what he was actually doing.

TcpnT

garmeg said:

dothenumbersaddup said:

Hello, I am 56, and would like to make a pension contribution of circa 25K this year. The question I have is - does it make more sense to buy two or three small pot pensions, rather than one larger one so I do not fall foul of LTA or MPAA rules?  I’ve not found many pension providers who specifically market small pots?  Is this because they do not make as much money out of them?

Hargreaves Lansdown will create a separate 'small pot' arrangement from a larger pension pot if you want to take £10,000 as a small pot. Think they are the only provider that is this accommodating!

Garmeg, thanks for this info about HL. Once again this forum has saved me a fortune.
I contacted HL to ask about the possibility of taking three lots of £10000 small pension commutation from the uncrystallised portion of my SIPP which will be over LTA. Turns out to be extremely simple as they don't even need to split off 3 small accounts before doing this - all taken care of inside their systems somehow and reported to HMRC in a way that satisfies their requirements for them to qualify as small pots.

The only requirement is to complete and sign a short application form (3 in total, one for each withdrawal) and supply a covering letter explaining which account these are to be taken from and how much to take. This covers the situation, as in my case, that the balance of the account is greater than £30000. For some reason the application forms do not ask for an amount to be specified - I assume because the intention of the rule is that it should apply to small pots of less than £10000 and the whole value would normally be cashed in.

They have acknowledged receipt of the forms and I have sold investments to make sure that there is at least £30000 in the account and the withdrawals should be completed within a couple of weeks.

So a £7500 tax free gain plus the balance withdrawn at BR tax with no LTA implications. Seems too good to be true.

Albermarle

So a £7500 tax free gain plus the balance withdrawn at BR tax with no LTA implications. Seems too good to be true.

From previous posts , the actual net gain is exactly £7500 , so a nice loophole for people over LTA ( or who are heading that way)

£30 K minus 25% LTA charge =  £22,500 minus 20% tax = £18K

£30K with 25% tax free and 75% taxed at basic rate = £25.5K 

TcpnT

Albermarle said:

So a £7500 tax free gain plus the balance withdrawn at BR tax with no LTA implications. Seems too good to be true.

From previous posts , the actual net gain is exactly £7500 , so a nice loophole for people over LTA ( or who are heading that way)

£30 K minus 25% LTA charge =  £22,500 minus 20% tax = £18K

£30K with 25% tax free and 75% taxed at basic rate = £25.5K 

Yes, maybe my wording was confusing there - I meant net overall gain. I agree with your calculation

AlanP_2

j.p said:

So HL is in effect allowing someone to have more than one SIPP at a time - at least for the brief period it takes to quickly split one and the small half prompty close it. I thought someone who opened a SIPP of a certain type with a provider couldn't create a parallel one of the same type and start paying into that, so as to keep the first pot "small", and then do it a third time, etc (and even a forth time if the first three are designed to be closed sub-£10k and only the forth one is meant to be the ongoing one). I thought someone had to split his pension among different providers (or types) in order to achieve that. But maybe it was just my assumption.

I think that is your assumption as you say, no restriction on how many or who you have pensions with.

There is a post a couple before this from someone trying to trace pensions relating to up to 15 old employers. Using your assumption a lot of those wouldn't have been allowed, which is a nonsense when you think about the underlying principle.

AlanP_2

We don't know all the details I agree but realistically if there are 15 the majority (if not all) are likely to be DC pots so the same as a SIPP in essence.

I took your comment to mean that the there were rules around number of pensions etc as you used the phrase "couldn't", whereas I've realised now that you mean providers don't offer the facility as far as you are aware which is true as far as I am aware.

TcpnT

j.p said:

I think someone with £30k+ and no pension wishing to make full use of the three small pots rule would need to open five pensions: Four would be SIPP's, and he'd contribute into three of them, or all four, tactically, trying to keep them under £10k. If one of them exceeds £10k that's fine because that's the one that, after closing the other three, he could stick to as the long-term one. But it might be the case that if the funds are invested and they grow, more than one will overshot, or the 'wrong' one will overshot. In that case he'd need something to trim them (a partial transfer out), and for that he'd need a fifth pension, a stakeholder pension - which always accepts transfers.
Pity there aren't many stakeholder pensions on offer, and the ones I've found have fees higher than any SIPP's. But then contributions to the stakeholder pension could be kept to a minimum, and as long as charges are proportional to the amount invested, which ought to be the case (assuming the person doesn't trade actively), that'd be OK, at least while nothing has been transferred into it.
One could be tempted to delay the opening of the stakeholder pension hoping that one might not need it, but what if in the future what's on offer in the market narrows even further? He could end up having to open a stakeholder pension with a provider he definitely doesn't like, because the ones he would have liked don't offer it any longer.
Also charges in stakeholder pensions ought to be capped at 1% after the tenth year. The sooner it is opened the sooner it will reach that date.

Just to clarify the situation in my case:
I have only ever had one SIPP. It was opened 4 years ago when I retired and transferred my company DC scheme to HL prior to starting drawdown. I crystallised most of it immediately but, because I still have a DB pension to come later this year, left approx £140K uncrystallised to ensure that I would not breach the LTA when the DB started paying.

From that point on my HL account shows two separate SIPP sections named "SIPP Income Drawdown" and "SIPP" which is the uncrystallised part. As of last week when I enquired about small pension commutation the "SIPP" section was valued at £175K.  I specifically asked whether they would create three new £10K sub accounts to qualify as Small Pots and was told that they did not do it this way and they were able to take the three £10K payments from the "SIPP" account and report to HMRC in a way that satisfied the Small pots criteria.

So in the case of j.p's person with £30K and no pension wishing to take advantage of the Small Pots rule - they would just need to open a single £30K SIPP with HL and then request 3 x small pot payments to be made. I find it hard to believe that HL can be the only provider offering this service.

Albermarle

 I find it hard to believe that HL can be the only provider offering this service.

It is the only provider I recall ever being mentioned that would do this . The others may not be interested because

1) The demand will be low

2) IT and admin systems may have to be changed to accommodate it 

3) Its clearly a tax loophole being exploited for a use it was not designed for . In this case I guess many providers prefer to stay clear in case HMRC take a closer interest one day .

Albermarle

I can confirm that Vanguard and Close Brothers "do not do" small pots. This is first-hand information. They would treat small pensions that are closed as UFPLS

Actually that is concerning . It seems only HL is willing to split off small pots from a larger pension , but I assumed other providers would be happy to make a small pot payment from a single pension worth less than £10K . Would be interesting to hear of other posters experiences with other providers.

I think we would benefit from seeing HMRC's internal guidance in respect to when small pots are rightly handled, and when they may constitute unauthorised payments

They are for sure not unauthorised payments .  It is just when small pots are used in this way to avoid paying some LTA, it could in theory be classed as aggressive tax avoidance . It seems unlikely this would comeback to bite any individual, but they might maybe lean on HL at some point to stop actively splitting off small pots. 

If guidance exists as to what does or does not constitute 'recycling', some may exist for this issue as well.

There are clear rules about recycling , just google it .

Dazed_and_C0nfused

j.p said:

I can confirm that Vanguard and Close Brothers "do not do" small pots. This is first-hand information. They would treat small pensions that are closed as UFPLS. I have not asked other providers.
This is slightly upsetting, as initially I thought all of them would. Now I think I'll have to do some more shopping around.
I think we'd benefit from having a list of providers besides HL who are definitely known to do small pots, perhaps attached to this thread. I thank @TcpnT for his comments.
I take note of @Albermarle's remarks. I think we would benefit from seeing HMRC's internal guidance in respect to when small pots are rightly handled, and when they may constitute unauthorised payments. If guidance exists as to what does or does not constitute 'recycling', some may exist for this issue as well.

Is this what you were after?
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063700