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

Using the pension system to your advantage isn’t just for the rich. Those with very small pension pots can benefit too.

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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.