The change in the pension system that came in this April, which means that people over the age of 55 can take 25 per cent of the money from their pension pot tax-free, could mean that basic rate taxpayers stand to make at least 6.25 per cent on their savings.
The combination of the tax boost to pension savings with a second change that came in last month turns into a guaranteed return for anyone still in work after the age of 54. This is because, under the new rules, people are not taxed on 25 per cent of each withdrawal they make.
This means that basic rate taxpayers who put £1,000 cash into their pension will get the 20 per cent tax they have paid on that back. If they then take the £1,000 out a year later, they will be taxed on it again but only after the 25 per cent tax-free allowance is accounted for.
This means, for the £1,000 they put in, they get £1,062.50 back, which is a gain of 6.25 per cent.
Meanwhile, higher-rate taxpayers get an even better deal, ending up with £1,166.67, which is a 16.7 per cent return.
Individuals can add up to £40,000 a year to a pension and still get tax relief, even if they don’t pay any tax, although only on £2,880 a year. However, assuming they continue to pay no tax after they retire, they effectively get a 25 per cent boost to their money.
The best way to take advantage of this loophole is to find a pension that allows people to take the cash out and charges as little as possible for saving money in it as cash and the most effective method for this is as a self-invested personal pension or SIPP.
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