It’s not just top rate taxpayers who can game the pensions system

I've written pretty regularly here about how the pensions system as it stands makes it little more than a tax management system for the rich. But Adrian Walker from Skandia has got in touch to explain how even the mildly well off and the non-working can game the system as they approach retirement.

How? Via the 'triviality' rules.

Let's say Mrs Smith opens a pension when she is 55. For the next five years she pays in £2,500 a year, for a total of £12,500. Every year the taxpayer chucks in an extra £625 in 20% tax relief regardless of whether Mrs S is working and paying tax or not. The money then makes a 3% annual return. Five years later there is £17,088 in Mrs M's account. From this she can instantly withdraw £4,272 tax free (as her 25% lump sum).

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But here is the good bit: because the remainder of the pot is so small (so trivial) in pension terms, instead of leaving her money at the mercy of government whim and the annuity system for ever like the rest of us have to, she can also withdraw the rest immediately as well.

She might have to pay basic income tax on the rest (at 20%), but even if she does, she will get another £10,253 back at least, making a total cash return on her investment of £14,525. It isn't a vast return, but it is one very much facilitated by assistance from the taxpayer.

So there you have it manipulating the pension system to your advantage isn't just for the rich.