£1,500 windfall for over-60s thanks to loophole in new pension laws

Loophole affects all pensioners with at least £8,000 to cash in

Pension pot of £8,000 earns Government top-up of £2,000 tax relief

If you withdraw it instantly, after tax, you take home £8,500

You can repeat the process three times, earning £1,500 in total

Top-rate taxpayers could earn double, as they get more tax relief



The trick, which has been confirmed by accountants and is legal, involves collecting the tax relief by withdrawing a pension pot multiple times

Millions of people over 60 could get a £1,500 windfall from the Treasury because of an extraordinary loophole in new pension laws.

Changes in this month’s Budget, effective from Thursday, allow pensioners to cash in small pension pots worth up to £10,000.

But the legislation leaves open a loophole that means trading in your pension pot can actually result in a profit – at taxpayers’ expense.

Experts last night said those able to access £8,000 cash could exploit the loophole to make a £1,500 profit this year.

Those with less cash can also take advantage, although they will make a smaller profit. Treasury sources said they are aware of the glitch, but do not plan to close it until April next year.

Experts predict the loophole could cost the taxpayer millions of pounds in total.

The extraordinary situation was revealed by BBC finance expert Paul Lewis, who presents Radio Four’s Money Box programme.

Mr Lewis said: ‘Generally I don’t approve of using tax wheezes – avoidance as I call it – but this loophole is built in to the current pension rules and has just been widened considerably.’

The new rules state that each person can cash in a pension pot worth up to £10,000 three times over. In the past, the limit was £2,000, making the potential profit very small.

A quarter of the money from the pot is tax-free with the rest taxed at the basic rate, if you are a basic rate taxpayer. The loophole works when you set up a pension, then cash it in at once.

Mr Lewis explained: ‘I don’t know what to call it, whether it is a loophole or a wheeze or an unintended consequence . . . But you can set up a pension pot of £10,000, you pay in £8,000, the Treasury tops it up with another £2,000, which is the tax relief on it.



Pensioners have always been able to use the method, but because the previous amount they were allowed to withdraw was only £2,000 the money to be made was negligible

'You take it out straight away and you get back after tax a total of £8,500.

‘So you put in £8,000 and you get back £8,500 – profit £500. In theory you could do that three times, so you could make £1,500 tax-free courtesy, I’m sorry to say, of the rest of us under 60.’

He added: ‘I have spoken to a number of accountants who confirm it is true.’

In theory, higher-rate taxpayers can make twice as much money because they qualify for double the level of tax relief. Participants must be aged 60 to 75 and in work.

A Treasury source said ‘appropriate and robust protections against such practices’ would be introduced next year – but conceded that the loophole is legal at present.



