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Realistbear

S T R Tactic--put 100% Of Your Salary Into Pension

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With the Govt removing all limits (practically) off pensions next year what is to stop someone who STR from paying in 100% of their salary into a pension fund (in safe short term investments) and having the government add 25%-40% (depending on your tax bracket) and living on the proceeds of your house?

You will be spending your house money but saving a huge amount with at least 25% added by the government. Emptying one pot to fill the other--but the pot you are filling is helped along courtesy of the Inland Revenue.

Seems that you will save a phenomenal amount of money, even if your earn a modest 25k per year for example. That's 2k per month into savings plus a free 500 pounds from the government. As you are saving 100% of your salary there is presumably zero tax to pay. Provided you have enough equity to live on for a few years from your STR you will have saved a huge amount over the course of 5 years, 25% of which is free money from the government.

What's wrong with this tactic? Sounds too good to be true? Anyone out there see a flaw?

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Interesting thread. What safe short term insvestments did you have in mind?

If this plan works it may cause the Revenue to re-think the 2006 proposal to allow no limit pensions?

Safe investments: very very short term bonds, or simple savings accounts.

It sounds too good to be true but it seems that someone who has STR can live on the proceeds tax free, invest 100% of salary to which the Inland Revenue add 25-40%.

Any accountants out there see a catch?

Edited by Realistbear

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There must be a catch......There always is.

Its possible that this wheeze is so simple that the government completely missed it? It seems like the answer to a tax free income and an opportunity to get a tax free pay rise of 25-40%. I have run this past a few people who, like me, cannot find the achilles heal. But then, none of us are accountants.

If it is as good as its sounds it will have to be taken advantage off quickly because its a gift the like of which has never been given before. :D

Edited by Realistbear

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Its possible that this wheeze is so simple that the government completely missed it? It seems like the answer to a tax free income and an opportunity to get a tax free pay rise of 25-40%. I have run this past a few people who, like me, cannot find the achilles heal. But then, none of us are accountants.

If it is as good as its sounds it will have to be taken advantage off quickly because its a gift the like of which has never been given before. :D

Unfortunately you have to pay income tax on your pension. So you would just be deferring the tax. However, if you pay higher rate tax now then you would save 40% tax and only pay 22% after you retire - presuming your pension is not so vast to qualify for higher rate tax. Also you can take some of your pension as cash at retirement, which is tax free. So still some tax advantages.

Also I think there are limits to what you can save tax free each year and in total. Inland Revenues website would probably say.

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What's wrong with this tactic? Sounds too good to be true? Anyone out there see a flaw?

Surely the flaw is that you are placing large sums of capital from your STR into a pension fund where it is not going to be easily accessable. Only once you are 50 (increasing to 55 in 2010) can you take benefits from the fund, even then only 25% is a tax free sum and the rest must be used to provide an income. The income provided is likely to be less than you think.

If you did this for a few years you'd have a hefty pension fund, but little capital left to buy another house when you choose to re-enter the property market.

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What's wrong with this tactic? Sounds too good to be true? Anyone out there see a flaw?

The flaw is that you can't use the money from the pension pot as a deposit on your next house, so you'll have spent your deposit on living expenses and stashed lots of money away in a pension that you can't touch until you're 55.

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The flaw is that you can't use the money from the pension pot as a deposit on your next house, so you'll have spent your deposit on living expenses and stashed lots of money away in a pension that you can't touch until you're 55.

With the 2006 changes it seems that you can buy a house for your pension (SIPP). Also, I am aged 54 and would like to retire at 60 if I can save enough.

The huge advantage seems to be that if someone in my position who has STR wants to sit out the house market for at least the next 5 years, it is a no-brainer to deposit 100% of my paycheck into a pension fund where the government will give me a free 25%-40%. I avoid all tax on my salary and pick up the tax on the pension fund--a double whammy? As I will soon be 55 its seems I will be able to draw out of the pension fund in a few years when the house market has bottomed and buy back in.

What seems to be too good to be true is the fact that the government will be paying me to save and my current income will be tax free also.

And all of this while the property market begins its slide to more sustainable levels (i.e. 30-40% off from the peak in 2004). This must surely define what could be said to be "financial hog heaven?"

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I see those flaws. But whats to stop people from keeping the STR pot but putting say 50% of their salary into the pension fund and living off the rest of it? Surely thats a halfway house and would work?

I could afford to do that I think...

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What's wrong with this tactic? Sounds too good to be true? Anyone out there see a flaw?

Surely one of the drawbacks is that once the money is in the pension fund it's in there for good. So the STR money that would be used for a house deposit would end up in a pension. It's a good way of boosting a pension fund, but not any good for keeping a house deposit.

As someone has said a pension only has a tax advantage if you contribute as a higher rate tax payer and retire as a lower rate tax payer (which most people would). If you contribute as a lower rate tax payer then you might as well pay into an ISA. You either pay tax on the money going in (an ISA) or on the money coming out (a pension). The only other benefit of a pension is that once the money is in the fund it can't be got out for emrgencies, in case of redundancy, by the DSS when inemployed etc - it's locked away safely.

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I wonder... even if such extreme schemes are not possible... it could be very tempting to use the opportunity to build up a pension pot.

People have been focussing on the lift that this could give the BTL market. I rather wonder if there couldn't be a lift in equities as a result of this influx. A good financial adviser would probably suggest that at least a portion of the portfolio should be in equities so perhaps there will be a boost to shares after "A" Day.

This is going to make rich people a lot richer.

My main fear over putting more into a pension is that once its locked up in there, a future government might find an excuse to take it away somehow. It seems frighteningly illiquid.

Also, if the STR eats away at the house capital, how are they to buy a house in future? If the market does crash then I guess they need a smaller mortgage so no problem. If there are not nominal falls, then they could be left without an opportunity to buy back in.

Edited by 2MeterBear

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I see those flaws. But whats to stop people from keeping the STR pot but putting say 50% of their salary into the pension fund and living off the rest of it? Surely thats a halfway house and would work?

I could afford to do that I think...

Seems that it will work on any amount. Its sheltering the taxable income and living off tax free income that sounds so good. The only requirement is that you have enough STR funds to survive while you dump your salary--or a significant part of it--into a tax sheltered fund.

What the government may have overlooked is the fact that people are now STR and have that money to live on while sheltering their salaries.

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I avoid all tax on my salary and pick up the tax on the pension fund--a double whammy?

Sadly not, you'll still pay tax in the normal way on your salary. When you pay funds into the pension they will be grossed up by the government to in effect negate the tax you have paid on your salary but you're only getting back what you've paid. No double whammy.

Also, yes you can use a SIPP to purchase property but then you'd have to rent it from your pension fund etc

(see the thread about SIPPs for more reasons why this is a bad idea).

[edit]

Also I don't think the government has overlooked anything. It's in their interests for people to be contributing to pensions hence why they have altered the rules and simplified the whole pension world. Things like this will benefit richer people most but that is often the case with any new legislation.

Edited by Voice of Reason

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Sadly not, you'll still pay tax in the normal way on your salary. When you pay funds into the pension they will be grossed up by the government to in effect negate the tax you have paid on your salary but you're only getting back what you've paid. No double whammy.

Also, yes you can use a SIPP to purchase property but then you'd have to rent it from your pension fund etc

(see the thread about SIPPs for more reasons why this is a bad idea).

[edit]

Also I don't think the government has overlooked anything. It's in their interests for people to be contributing to pensions hence why they have altered the rules and simplified the whole pension world. Things like this will benefit richer people most but that is often the case with any new legislation.

Thanks--yes I see how your salary will still be taxed in the normal way even though you are dumping 100% into a pension fund. But.... you are at least tax neutral if all of your salary goes into the fund? The government are refunding the tax they have taken from you. The result is that your salary is, in effect, tax free. It gets tied up into a pension fund but for us older STRs this is not a problem as we can draw it out at 55 in any event.

For me and others in their 50's, provided we have enough from our STR, we are better than tax neutral if we save 100% of our salary as, presumably, we get the government's kick back on 100% of our salary with the personal allowance ignored?

The key to the whole windfall scheme seems to be having tax free funds available to live on while the salary goes to the tax sheltered pension fund.

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All income taken from a pension is taxed as the normal rules, except I beleive your personal allowance goes up(tax code) once reaching 65 and 75, so in fact the government does gets its pound of flesh regardless.

If you sold you house 5 years before retiring or being able to draw your pension and after CGT had 100k burning a hole in your pocket, and earnt 20k a year, a pension pot of 100k and you had two options

a) put the 100k in your pension(not sure if this is possible) to take it to 200k

B) put 20k a year salary with an effective take rate of 20%, so got say an extra 5k added if all going into a pension( youd still pay NI I think)

Assuming 10% growth p.a

a)Final £322k pension pot

b)Final £274k pension pot

Selling upwould incur capital gains tax but if you put the equity in your pension would prevent any inheritance tax if you popped your clogs early and you I think can pass pensions over to spouses with no charge

No idea what 322k would buy as an annuity, but remember youd get taxed on the income from it like the rest of UK slaves.

Hhhmm thinking about it your 100k equity is actually going to incur income tax if you put it into a pension and then bought an annuity. Hhhhmm its all rather complex isnt it really, no wonder people dont give too much thought about it!

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I wonder... even if such extreme schemes are not possible... it could be very tempting to use the opportunity to build up a pension pot.

People have been focussing on the lift that this could give the BTL market. I rather wonder if there couldn't be a lift in equities as a result of this influx. A good financial adviser would probably suggest that at least a portion of the portfolio should be in equities so perhaps there will be a boost to shares after "A" Day.

This is going to make rich people a lot richer.

My main fear over putting more into a pension is that once its locked up in there, a future government might find an excuse to take it away somehow. It seems frighteningly illiquid.

Also, if the STR eats away at the house capital, how are they to buy a house in future? If the market does crash then I guess they need a smaller mortgage so no problem. If there are not nominal falls, then they could be left without an opportunity to buy back in.

Retrospective legislation is unlikely in the UK. If the government have created a "lacuna" here they will close the loophole for future tax avoidance schemes. The idea of living off house proceeds while placing taxable income into a tax shelter may only work for a very few people: STRs who have enough equity to live on while depositing their salaries into tax free investments.

In the immortal words of that great, late, fat American comedian: How sweet it is........

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If I recall correctly, there is a maximum limited to what you can pay in to one of these new pensions per year (I think it is something like £250,000) and there is also a limit to how big your pension pot can grow to before tax relief on contributions stops (I think the total is something like £1,500,000 adjusted for inflation).

The government will get there tax take when you retire and start drawing an income from your pension. So by not paying the tax now, you are just deferring it, sooner or later the state gets its cut!

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With the 2006 changes it seems that you can buy a house for your pension (SIPP). Also, I am aged 54 and would like to retire at 60 if I can save enough.

The huge advantage seems to be that if someone in my position who has STR wants to sit out the house market for at least the next 5 years, it is a no-brainer to deposit 100% of my paycheck into a pension fund where the government will give me a free 25%-40%. I avoid all tax on my salary and pick up the tax on the pension fund--a double whammy? As I will soon be 55 its seems I will be able to draw out of the pension fund in a few years when the house market has bottomed and buy back in.

What seems to be too good to be true is the fact that the government will be paying me to save and my current income will be tax free also.

And all of this while the property market begins its slide to more sustainable levels (i.e. 30-40% off from the peak in 2004). This must surely define what could be said to be "financial hog heaven?"

You can buy a house, but you have to pay your pension fund a market rent if you want to live in it.

And you can only take 25% of your pension fund as a lump sum; the rest has to be income.

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It's nice to see that these new pension rules are actually making people get a little excited about pensions.

Since the governments goal is to get more people to save more money for retirement, I think the new pension rules will definitely help towards that.

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Ok... how about this.

Someone earning 100k p.a. pays it in to the pension for the next 3 years, building up a pot of 300k. This is then used as the deposit on a BTL within the pension, making it possible to buy a house for 450k.

The person then lives in the house and pays the market rent to the pension fund. This is then offset against the mortgage payments on the 150k. Effectively you would be paying the mortgage anyway... so all you are doing is locking the equity value of your property into your pension, getting full tax relief on your entire salary.

Of course, if people go down this route, houses may simply continue to climb in price and in 3 years the STR will only be able to afford a hut in the woods. (Cave in my case)

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Ok... how about this.

Someone earning 100k p.a. pays it in to the pension for the next 3 years, building up a pot of 300k. This is then used as the deposit on a BTL within the pension, making it possible to buy a house for 450k.

The person then lives in the house and pays the market rent to the pension fund. This is then offset against the mortgage payments on the 150k. Effectively you would be paying the mortgage anyway... so all you are doing is locking the equity value of your property into your pension, getting full tax relief on your entire salary.

Of course, if people go down this route, houses may simply continue to climb in price and in 3 years the STR will only be able to afford a hut in the woods. (Cave in my case)

The catch is, you're paying the rent out of your taxed income, and don't get tax relief on it. If you were just paying the same amount of money into the pension directly, you'be be able to get 40% relief on it.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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