Something for nothing, and your pension for free?

There seems to have been an unintended and unexpected consequence of the pension changes announced by the Chancellor in last week’s budget, and that is the ability to get some money free from HMRC. And that’s not something you see yourself writing every day.

It works like this. If you are a basic rate taxpayer you write a cheque for £8000 into a pension. HMRC top that up with another £2000, the 20% basic rate income tax you would have paid on that contribution. New rules allow you to cash-in that pension straight away as long as you are between 60 and 75, and earn at least as much as you invest into the pension.

The first 25%, or £2500 is tax-free and you pay income tax at 20% on the other £7500, a total of £1500. So you are left with a £2500 plus £6000 or £8500, a profit of £500.
And you can take the initial £8000 and do the same thing again, and again. You have to stop after you have done it 3 times but by then you’ll have made £1500.

If you are a higher rate taxpayer then the profit is £1000 a time, although it’s a more convoluted process and involves a self-assessment return so will take longer.

But you can do it. It’s unlikely that this loophole will be available when the rules change again in April 2015, and you’ll need to find an IFA or pension provider who will allow you to do it, but it can be done. It seems to work, and it’s legal.

But is it right? Where do you draw your line? Is it right to take advantage of loopholes like this, or do you take the moral high ground that says that it’s going against the spirit of the legislation and therefore it’s not for you?

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