Saturday 15 September 2012

Retired? Get 25% Instant Return!

You're retired, you've taken your pension and you're done with  all of that. Or are you?

Assuming you have enough income, not necessarily.

And just to make it interesting, how about a 25% instant return on your money?
A bold claim, you might say - but here's how it might work (I say this as I haven't actually done it yet). And as I am not a pensions or tax advisor, take this all as a proposal to be tested/discussed.

Most people know that the UK Taxman encourages workers to save in a pension. They do this by giving a tax refund on any money paid into the pension, even for higher-rate earners - although there are limits. So, tax-free going in, but taxable when you take your pension.

In addition, the Taxman allow you to take out a tax-free lump sum (usually up to 25% of the pension fund value). Put it all together and this is irresistible value for a higher-rate taxpayer; and not bad for a basic-rate taxpayer (although investing in an ISA would give a broadly similar return - but you can do both, after all).

Now, there is a little-known pension tax concession for non-working people. You can pay in a limited amount of money and receive a refund, as if you were a basic-rate taxpayer. There is a limit to the Taxman's generosity, of course: the amount saved in any year (including the tax refund) cannot exceed £3600. But the tax refund means that you only need to deposit £2880 (80% of £3600) - giving an instant profit of £720 or 25%.

So, assuming you are retired and have some income from your savings (i.e. not your pension or tax-free lump sum), you can invest £2880 of this in a Self-Invested Personal Pension (SIPP) every year (unless the rules change, of course). As I understand it, you can hold this until you are 75 and then take a 25% tax-free lump sum and the rest as an annuity.

Assuming you start doing this at 60 and that you survive until 75 - that gives you 15 years' worth of tax refunds plus any tax-free growth within your new SIPP, plus a tax-free lump sum at the end of it. Moreover, if you have the income to spare, you could do this for a spouse or even a non-working child or grandchild. picking up the 25% boost for each of them and avoiding Inheritance Tax at the same time.

Worth thinking about, surely?

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. This is "recycling". It will not surprise you to know that HMRC are against it. Their anti-recycling measures can't be planned around easily - and indeed one of their rules is in effect that if you planned to recycle, you will be penalised.

    1. Hi TulipCraze,

      Yes that's true - but this is not what I am suggesting:
      a) you are retired (i.e. no longer working)
      b) you have income from other sources (e.g. pre-existing investments)
      c) a max of £2880 (grossed up to £3600)

      As the document you quote says:"Whereas PCLS recycling is restricted, income from both annuities and drawdown pensions can be recycled and the only effective limit to obtain tax relief is £3,600 per annum, or the member’s relevant UK earnings, if higher."