Pension loopholes: five ways to get money for nothing- Richard Dyson

The new pension rules have created quirkly ways to claim back tax. Here are five loopholes - can you think of more?

Britain’s massive pensions overhaul, which takes effect in April next year, is giving rise to clever new ways in which savers can profit. It’s “free” money courtesy of the taxman – for those who are organised enough to benefit.

Under the changes even modest savers can access their entire pension pots without having to demonstrate that they have other income. It means money can be put in a pension, attract tax relief and then be more or less instantly withdrawn.

Sometimes you can do it again and again, every tax year.

The saver’s level of earnings and rate of tax are just two of the key considerations, however, as we explain here.

Loophole 1: How a low-earning pensioner could claim from £500 to £2,000 – every year

This will work from next April. Say you are over 55 and have already drawn your pension. You can still invest up to £10,000 per year into a pension, attracting tax relief by doing so. You’ll need to earn at least £10,000 a year. Here’s how it would work:
1) You pay £8,000 into a pension. This gets topped up to £10,000 thanks to 20pc tax relief.
2) You immediately withdraw the money. The first 25pc (£2,500) is tax-free, the rest is taxed as income. If you paid 20pc tax on £7,500, that would be £1,500, still giving you a clear £500 for your troubles. But an individual’s tax allowance (the part of their income they can earn tax-free) is £10,000 for this tax year, so lower earners won’t pay that much tax. When married couples live together and can share expenditure it could be even easier to make the most of this.
You can repeat this year after year, as long as your earnings qualify.
Loophole 2: How married pensioners could claim between £1,440 and £2,520 – every year
Again, this will work only after April’s changes are implemented. Both husband and wife must be over 55. It's most effective where one person (say, for the example’s sake, the husband) is still working and earns a high enough wage to pay the higher rate of tax of 40pc. The wife isn’t working and has little or no income. Here’s how it would work:
1) The wife pays £2,880 into her pension and the taxman tops it up to £3,600 – that’s a £720 boost. The £3,600 sum is the most a non-earner can pay into a pension each tax year.
2) She withdraws the money immediately, keeping the top-up. As a non-earner she doesn’t pay tax, as the sum falls below her annual tax‑free allowance.
3) The wife immediately passes the £3,600 to her husband. There are no tax implications in doing so because they are married. He then invests the £3,600 into his pension. It immediately gets boosted by the 20pc rebate – that’s £900, taking it to a total £4,500.
4) As a higher-rate taxpayer, the husband can claim back the further 20pc (taking the total rebate to 40pc) through his tax return, netting another £900. Hence an initial £2,880 has attracted tax benefits worth £2,520 – or a boost of 88pc.
It works best when one spouse is a high earner paying 40pc tax, but if the earner is only a basic-rate taxpayer the couple would still end up being able to contribute £4,500 to a pension based on their own, initial contribution of just £2,880.
And if neither earns at all they can still benefit. One spouse pays in £2,880 to attract the 20pc benefit, giving rise to the maximum £3,600 annual subscription. They then withdraw the £2,880 and pass this to their spouse to do the same. Because they are both non-earners, that is the most they can each put in. But each still benefits from a £720 uplift – in total a return on the original £2,880 invested of £1,440. This can be done year after year (a more detailed description of this loophole is written up here).
Loophole 3: How someone aged over 60 could claim £3,500 (and possibly more)
Here the circumstances would need to be quite specific to deliver the benefit. This loophole has been effective since March this year – so if you fit the bill, you could do it now. You’d need to be over 60, earning £30,000 or more, and have little or no pension already saved up. Here’s how it would work:
1) You pay £24,000 into a pension. This is boosted to £30,000 by the 20pc tax relief.
2) You immediately withdraw the pension under what are known as “trivial commutation” rules.
3) You get 25pc (£7,500) of this tax free. The remaining £22,500, reduced by your £10,000 personal allowance, gives rise to a tax bill of £2,500 – hence the benefit of £3,500. You can use this loophole once only, so time the process so as to take the pension benefit in a subsequent tax year when your income has dipped and you have a fresh personal allowance.
Loophole 4: Over 60, earning, and with existing pension savings: you too could get £3,500
Say you're 60, have £30,000 of earnings and do have some pension savings (unlike the scenario above).
1) You too need to put £24,000 into a pension. But not altogether. You need to put it into three, separate pensions.
2) You put £8,000 in each pension account, and each attracts a further £2,000 in relief.
3) You then withdraw the money from all three, relying on another dispensation known as the "small pot" commutation rule to get the money out. The tax situation is as above, in Loophole 3.
Loophole 5: In work and close to retirement? Then join the pension, stupid!
This is less a loophole and more common sense. The new pension freedoms, plus the personal allowance, mean the attractions of contributing even small sums for short periods are greater.
Official figures show that while younger workers do tend to take up work pension offers, older employees don't - perhaps because they mistakenly think there's not enough time to benefit. Anyone thinking that would almost certainly be wrong. There is. The tax breaks, for instance, are immediate, and they don't involve an iota of investment risk.
Under “auto-enrolment” rules companies must offer workers pensions where employees’ own contributions (currently 0.8pc of salary) are matched with an employer’s 1pc contribution and then topped up with tax relief. Given that this money can be withdrawn in total, provided that the saver is over 55, and taxed at their then rate, it’s a winner.
Laith Khalaf of investment shop Hargreaves Lansdown said: “The new rules are going to throw up lots of opportunities for savvy investors, but only if you get to grips with your tax situation to make the most of it.”

Culled from Telegraph