Title - How to make more money from your pension ?
Hi. In this video, I’m going to look at how you could make extra money from your pension pot. And it applies to anyone who's been saving money through their working lives into a pension pot and is now 55 or over, and you're now ready to start withdrawing money out from your pension.
So, the technique we're going to look at today is called ‘pension recycling’. And the basic idea of pension recycling is that you take money out of your pension, and then you pay it back in.
On paying it back in, the tax man gives you an extra boost with a tax break so your money grows, and then you can withdraw it again and the circle keeps going around. Every time you pay it back in, you get a boost from the tax man.
Now pension recycling has been around for a long time. It's not a new thing, but the opportunities for it, I think, are growing now because of George Osborne's big pension revolution that he started to implement in April 2014, and there's going to be more changes coming through in April 2015.
And with all these new changes, pension recycling, I think, will become a more attractive opportunity for many people. So, just as a quick refresher on these pension changes going forward, there's really going to be three main ways for withdrawing money from your pension pot.
You'll be able to buy an annuity – a good, old-fashioned annuity, which most people buy now – and you buy an income for the rest of your life.
Or you could do something called ‘flexi drawdown’ – very similar to something called ‘flexible drawdown’, which has been around for a while. That’s where you leave your pension pot invested, but you withdraw varied amounts each year.
And then there's a new way to withdraw money from your pension – it's called the UFPLS. That stands for ‘uncrystallised fund pension lump sum’. Now, in many ways the UFPLS isn't that different from flexi drawdown, but it's better if you want to do this game of pension recycling.
So, you might want to ask, how are we going to do this? How is it going to work? How are we going to make money? Well, here's an example.
Let's imagine you've got £8,000 and you decide to pay it into your pension. You pay £8,000 into your pension pot and the tax man, assuming you're a basic rate tax payer paying 20% income tax, the tax man boosts your pension pot up to £10,000. So, you've got a nice £2,000 profit.
Now you want to get the money out from your pension pot so you can spend it. Well, you will have to pay some income tax, but with any withdrawal from your pension pot, there's always been the 25% tax-free lump sum.
So, traditionally, when you started withdrawing money from your pension pot, say you have a £100,000 pot, you could take out £25,000 and not pay any tax. The beauty of the UFPLS is that instead of taking all of that tax-free lump sum upfront, you can take a bit of it every time you withdraw money from the pension pot.
So, let's say you decide to withdraw £10,000 from the pension pot. Remember, we had £8,000 and the taxman kindly boosted it to £10,000 for us. Now, we take £10,000 out as a UFPLS. £2,500 is tax free. The other £7,500 we've got to pay income tax on, 20% of £7,500 is £1,500, so we end up paying £1,500 income tax – £10,000 minus £1,500 income tax and we've got £8,500.
So, we've turned the £8,000 into £8,500 – we've made a £500 profit simply by paying money into the pension pot and taking it out immediately. And you could carry on doing this year after year and making a nice little profit each year thanks to the taxman's little tax break.
Now, you might be thinking, “Wow, that's brilliant! I'm going to recycle hundreds of thousands of pounds through my pension each year and make loads of money.” Well, sadly, George Osborne is wise to this and he said that once you start withdrawing money from your pension via a flexi drawdown or a UFPLS, you can only pay £10,000 back into your pension each year.
So, the potential profits are significant, but they are a bit limited. But that doesn't mean you shouldn't do it. £500 is £500. No one is going to turn their noses up at that.
And actually, if you go for an annuity, you'll still be able to pay in £40,000 each year. And the point about annuities is we're going to see new rules for annuities making them more flexible, meaning that you can get more variation in your annuity and income each year.