Make Money By Switching Cash From ISAs To Pensions

It’s easy for higher rate taxpayers to make cash from the new rules that let over 55s draw cash from their defined contribution pensions just by moving cash around in retirement savings accounts.

Currently, no tax rule stops anyone from putting money in their pension on one day, collecting the pension relief contribution top up and then drawing the cash out almost immediately.

So, a retirement saver can take savings out of an ISA or bank account and stuff the cash into a pension to make an instant profit.

Under tax rules, HM Revenue & Customs (HMRC) will top this up by 20% for a basic rate taxpayer or 40% for a higher rate taxpayer.

The only point to watch is that the total contributions do not breach the maximum pension contribution for the year – which is £40,000.

If the saver does not have a defined contribution pension, they are easy to start with a single contribution.

How the money maker works

Here’s how the figures work for a basic rate taxpayer –

Pay £40,000 from other savings into the defined contribution pension.

HMRC tops up the contribution by 20%, or £8,000, making a total fund of £48,000

Take the 25% tax-free lump sum of £12,000

Draw down the rest over time paying tax at 20% – which reduces the pot by £7,200.

Because the pension was topped up by £8,000, the profit is £800 almost overnight.

For a high rate taxpayer, the strategy is slightly different.

Pay £40,000 from other savings into the defined contribution pension.

HMRC tops up the contribution by 40%, or £16,000, making a total fund of £56,000

Take the 25% tax-free lump sum of £14,000

Draw down the rest over time, hopefully as a basic rate taxpayer at 20% – which reduces the pot by £8,400.

Because the pension was topped up by £16,000, the profit is £7,600 almost overnight.

Combining strategies

Higher rate taxpayers need a little patience with the strategy as paying income tax at 40% on the remaining fun after taking the tax-free lump sum wipes pout any gain.

Some investors combine this strategy with ISAs or National Savings that pay tax-free above inflation interest rates on corporate bonds or savings bonds and then switch the cash into a pension for the top-up before drawing down their pensions.

Others switch cash into a UK pension before switching their cash offshore into Qualifying Recognised Overseas Pension Schemes (QROPS).

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