Pensions loophole allow savers to make risk-free £500 profit

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04 Apr, 2014

Pensions loophole allow savers to make risk-free £500 profit

New pension rules in the latest rendition delivered by Chancellor George Osborne is allowing people between the ages of 60 and 75 to withdraw small pension pots as cash instead of taking them out as negligible monthly payments. This means people are able to pour their funds into a pension pot, get tax relief added on top and then proceed to take out the money as a single cash lump sum. The crucial part of this deal is that people can take a quarter of those funds tax free.

Now, since the biggest retirement pot which can be withdrawn as cash is £10,000, a regular rate taxpayer would need to put in £8,000, with the remaining being tax relief, which is added automatically. When withdrawn as cash and paying 20% in taxes on 75% of these funds, after removing the tax charge, the saver will be making an instant profit of £500.  

The loophole was pointed out by Tom McPhail of Hargreaves Lansdown, but he doesn’t believe people will be able to make use of it for very long. “It is a loophole and I expect the Chancellor to close it without delay," he said.