Pension Pots

Workplace pensions have been regularly advertised both on TV and other media:

Under the new arrangements you will not be allowed to drawdown on your pension pot until you reach 55.

Then, taking the example, you will be taxed at you marginal rate on 75% of your drawdown i.e 20% say of 75% of the hypothetical £80 = £12

but the government only put in £10 and so you will not be quids in.

There was a report by Paul Lewis on the Money Box programme concerning a tax-loophole where you can now put in money to a pension pot: the Government make a contribution: you then close the pot (pay tax) - but are quids in.

Does anyone have a reference to any details?

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I have to say that it's a lot of faffing about for 500 quid, but rate tarts change accounts for far less

tim

Thanks for the link: it looks like Rowing is incorrect.

I don't know: it looks like it is just the sort of the thing richer people with £8,000 cash to hand will be able to do to make £1,500 quick profit at ordinary tax-payers expense: a married couple 3,000 - quids in.

Why on earth the Government aren't closing the loop-hole until this time next year - I have no idea.

I suppose it may win a few votes.

Thank you for the pointer; I must speak to my financial advisor.

Colin Bignell

Many companies offer a SAYE scheme (save as you earn scheme) to contribute to your pension. The advantage of such schemes is you avoid employees NI on the contributions and many employers will also pay in an equivalent to the employers NI which was avoided on their part as a result of your decision to join the SAYE scheme. This equates to about 20% extra contribution. The above is in addition to the income tax avoidance.

I'm a bit lost about exactly what's wrong? People can invest up to £1.25m in pensions (up to £40k pa) and get tax relief. This so called loophole is just investing money into a pension and then taking it out again. It makes no difference whether they take it out straight away or a few years later.

Then the gov.uk site which I cited and based my calulations must be wrong also.

I would like to know how a £8000 pension payment could attract £2000 tax relief unless the payer was a higher rate tax payer paticularly when another government site:

states:

"Personal pensions

You pay Income Tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return or by telephoning or writing to HMRC. If you're an additional rate taxpayer you'll have to claim the difference through your tax return"

Perhaps that one's wrong too!

It would also be interesting to know why, if you know the answer, why you are arsed to ask the question.

I would also add that this totally ignores the question of setup and early cancellation charges which AFAIK all companies apply.

Be sure, that if there is easy money to be made by clients then financial providers will want some of it. They are in the business to make money for themselves as well as you.

In fact the golden rule of finance is make your profits out of other people's money preferably at their risk.

There is the question of tax. Pension contributions attract tax relief.

All governments are hungry for tax revenue and nobody thinks the time will ever dawn when they collect their pensions. In that sense, pension taxes represent painless revenue and by the time contributors start to miss it, the imposers will be well and truly out of it.

This could be the precurser of the seruptitious fading out of pension tax relief which I'm afraid few people would even notice.

What governments will never do is abolish taxation of savings altogether provided payers were prepared to ring fence both the capital and reinvested earnings until they reach some presribed age (call it a irement age if you like) Any premature liquidation of this cash pot for would render the lot liable to repayment of that proportion of the fund attributable to unpaid tax. Any liquidation of the assets after the prescribed date would be treated as taxable income in the normal way.

If governments seek a real answer to the pensions problem then there they have it.

do you mean 'the lot liable' or the proportion taken, liable?

if a person draws down a sum in 'emergency'(or otherwise)

That's £10,000 gross. £2,000 of £10,000 is 20%, which is basic rat e tax.

Pensions are deferred tax savings, with the option of up to 25% as tax free savings. Being deferred tax, when it actually gets taxed, it may be at a lower, or even zero, marginal rate. With the new option for direct cashing at marginal rate, the actual tax could exceed the deferred tax.

The government offers other zero tax savings options, with no minimum age for withdrawal.

You need to read what people write: spot the words "the sort of the thing richer people with £8,000 cash to hand will be able to do"

There will not be many people on lowest rates of Income Tax who have £8,000 to pop in to a pension pot: just to make money from Government incompetence.

Oh dear: I was made aware of the matter by a colleague. I was posting here to see if I could get more information from people who were aware of the c*ck-up and ensuing loophole.

Tim posted a link to a newspaper article which tends to confirm the story - but with no great further detail.

I - and I guess many others here - would like to know the full details.

I'm amazed anyone dumb enough to trust a financial adviser wouldn't have already disposed of any surplus with a Sky subscription.

I have now found some more info from the Paul Lewis blog

Open a personal pension plan (PPP) and pay in £8000. The Treasury puts in another £2000.That represents the basic rate tax you have paid to have £8000 left. The total in your fund is £10,000.

From Thursday 27 March a pension pot up to £10,000 counts as a small pot and can be taken out in cash as a lump sum.

Immediately take out your small pot as cash The first 25% is tax free. That is £2500. The remaining £7500 is taxed at your basic rate. That will cost 20% which is £1500 You are left with £6000. Add on the £2500 tax free and you have £8500. Even though you only put in £8000. Profit £500.

You can cash in up to three small pots, so you could make £1500 for nothing.

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Finally (Paul Lewis says):

The facts in this blog have been checked with two top accountants and with pension providers and investment platforms. The Treasury has made it clear to me that officials recognised this consequence of the interim changes on 27 March. It seems that it does not intend to block this loophole in the current rules. But the Treasury will make sure that it cannot continue in its present form when the April 2015 changes begin. A spokeswoman told me "We are now consulting on how best to deliver the next step in our radical plan to let people withdraw their defined contribution pensions savings how they wish. This includes ensuring robust anti-avoidance measures are in place.? How small a pot will be caught by these measures will be the interesting thing to watch out for.

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NB The full amount does not apply to those not earning. The exception is a single pot of up to £3600 including basic rate tax relief which can be opened by or for someone with low or no earnings.

On 01/04/2014 12:44, abelard wrote:> On Tue, 01 Apr 2014 12:27:52 +0100, Mel Rowing

The latter!

The primary purpose of such a system would be to ensure that savers would be encouraged to acquire financial assets to fuund or help fund retirement. Should savers have access to this money prior to retirement then its purpose could be defeated. Such a system would eliminate entirely the need for tax reliefs on contributions.

I'm afraid however that this cultivated dependence upon government and the state is too attractive politically.

ok, thanx

aye, 'it's a problem'!

It is a reduction in tax, not actual profit. You are paying £1,500 in

tax, rather than £2,000.

Also, I suspect, but haven't checked it, that the limit is on the total pot, so only people without significant pension savings will be eligible.

They have no more access to privileged infomration than you or I have.

I remember two or three conversations I had with one in a sheffeld pub back in the the 70s. It just so happened that we were using the same refreshment facilty over the same period of time and latched on to each other. I never saw him again afterwards.

He was a remarkable guy and cut quite a dash in his prestine white shirt and gold cufflinks. He had apparently been a high flyer with Barclays Bank and had been elevated to manager of a fair sized branch by his early 30s. His probalem was that he was bored out of his mind by the work. One day he was so down that he summoned his secretary and dictated his resignation. Apparently her eyes almost popped out of her head. He had a blazing row when he went home and told his then wife what he had done.

Upon leaving Barclays he rented an office and placed a few adverts in the local press. Upon the first terrible day, he sat alone in that office and nobody came near. He wondered whether he had made the mistake of his life. On the second day he had his first client. He was a farmer who had got himself in a hell of a mess with his finances. He was carrying a shoe box tied up with string which at the end of the interview he handed over with the instruction to "Sort it all out" In his own words, "From that time on I knew he was working for me!" with a wry smile. At that moment in time, he claimed to be doing very well and seemed not to have a care in the world.

I have known garage mechanics who have given up jobs to become fininancial advisers after a few days on a course being equipped with a stationary pack. One night I answered a knock on the door. There was a former colleague on the doorstep. I greeted him and invited him in as one would. We had just finished the evening meal and he accepted a cup of coffee. We chattered a gossiped for about 15 minutes before the real purpose of his visit began to become apparent. He had come to put some business my way "if I were interested" I let him ramble on for a time but as he started to introduce glossy brochures into the conversation. It was obvious to me that he had learned a script. Anyway at this point, I brought the conversation to an end telling him I was not interested and advising him to get back to that what he knew. I never saw him again either though I did hear on the grapevine that he had lost his job as a "financial adviser". In fact he was a glorified insurance salesman. He had had increasing difficulty in meeting his forms sales targets as he worked through his social circle. This was nothing more than cynical sales strategy. It was amazing how many of us had enjoyed these social calls.

That is what financial advisers are and do.

Having said all that reference has been made here to one Paul Lewis. I always stop and pay attention whenever Paul is on the box. He's at the top of his trade and is well versed in his subject. In fact I would call him a financial journalist and he is well worth a listen or read.

I would not confuse him with the others.

It is a reduction in tax, not actual profit.

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no, it's actual real money back that you couldn't otherwise gain

That may be what some are. There are also some out there who are well worth the small percentage they charge.

Colin Bignell