Arbitraging pensions?

mr._prude

I would be interested to know if anyone is trying or thinking about this?

I have two pension, pension A is my combined stakeholder from all previous employments. There are no contributions going into it but it's growing about 14% per year.

My second pension is my current work pension, my employer puts in 9%, I put in 11%, via salary sacrifice (42% tax relief), plus my employer puts their employer NI savings in, (15% of my 11% contribution).

I plan to keep increasing my contributions 4-6% per year, with the objective of trying to get to a point I am not paying the 42% taxes and then some 28% taxes.

At some stage after 55, I am could start taking tax free 25% chunks out of pension A.

E.g

Take 25% tax free from 40k chunks (10k) from Pension A.

But put 20k gross into pension B (9.86k net)

Some things I need to be aware of, salary must stay above the minimum wage.

Can not drawdown £1 of pension A as it triggers the MPAA.

Any pension contributions increases need to stay within pension recycling rules once tax free sums are taken.

Sarahspangles

One of the HMRC tests is whether you planned to recycle your lump sum. The Royal London have a flow chart which gives an idea of the checks people carry out to make sure they don’t trigger an investigation even with a non-recycling event. In scenarios like ‘Lump sum was to clear a mortgage, but I then unexpectedly inherited’.

When you take a lump sum - including as part of an UFPLS - there’s now an extra step where the provider checks previous withdrawals against allowances. Obviously the lifetime ceiling is one constraint on recycling, but I also wonder if a pattern of withdrawals would lead to a provider dropping a customer, to avoid being drawn into an investigation.

There’s also the issue that crystallisation of your pension fund means you’re taxed on the original value plus the investment growth when you do take it, which could erode any gains from recycling.

Isthisforreal99

You are maybe confusing matters by referring to 42% and 28% tax relief - do you actually mean 40%/20% tax relief and 2%/8% NIC relief.

Are you aware of the changes from April 29 restricting NIC savings on pension salary sacrifice to the first £2000 only? Therefore the future savings not going to be as high.

How does 2nd pension compare performance wise to pension A? 14% is a good return. Annual allowance may also come into play at some point.

Finally, check that pension B accepts direct contributions from you. Not all do.

mrklaw

you’d be risking pension recyling. Unless you have a partner and use TFC to pay into their pension. But in that case I don’t know that the numbers work that well?

They’d get 20% tax relief, and 15% tax on withdrawal treating it as a whole. and obviously tax free on withdrawl from your pot. so a small mathmatical benefit. But you have to factor the cost of your lost TFC - any withdrawals of the crystallised portion will now be at least 20% rather than 15% so isn’t it a wash overall?

your tax exposure : 15%→20%

their tax exposure : 20%-15%

Albermarle

I have two pension, pension A is my combined stakeholder from all previous employments. There are no contributions going into it but it's growing about 14% per year.

I would not bank on it continuing at that rate !

mr._prude

Regarding tax, yes, I just think of them as an overall employee tax 28%/42% made up of income tax 20%/40% and national insurance 8%/2%.

National insurance is just another tax dressed up to not look as bad.

Employee tax @ 28% & 42% after £12,570 is the real rate.

Regarding salary sacrifice, hopefully by April 2029, the be a different government.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81967172#Comment_81967172

Regarding salary sacrifice, hopefully by April 2029, the be a different government.

Best to avoid political comment on here, but as you mention it, I do not think a different Govt would rush to overturn the proposed limits on salary sacrifice. Using it for pension contributions was never really its intention, and it has become an expensive loophole method for avoiding NI ( employees and employers). Probably a new Govt, if they wanted to cut taxes, would more likely do something more headline grabbing and easy for the average voter to understand.

QrizB

Regarding salary sacrifice, hopefully by April 2029, the be a different government.

The latest possible date for the next GE appears to be the 15th of August 2029, so don't get your hopes up.

af1963

https://forums.moneysavingexpert.com/discussion/comment/81967215#Comment_81967215

Also don't count on parties changing things once they are in government even if they have been critical of them when in opposition. Almost every opposition politician was happy to use the "Gordon Brown ate my pension" stories from way back, but none of them ever reversed the changes. Plus, as Albermarle says, if there is money available for tax giveaways by any government, expect them to be on something less niche than this.

af1963

The Royal London flowchart that was mentioned above is here:

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

One point worth noting is that amounts of tax free cash up to £7500 per year are not considered recycling. So you could potentially take it out a little more slowly and avoid the issue.