Three for the price of one!

Topic:

Hot topic

Date published:

Tuesday, 16 June 2015

Author:

Gillian Graham

Have you heard the one about the financial adviser who has found the perfect solution for clients to pay less tax?

We recently heard of a case where, when the member’s transfer value was less than £30,000 but greater than the small pot limit of £10,000, an IFA suggested this could be paid out in three instalments under the small pot rules!

In the greater scheme of things I don’t suppose this is a major issue, but it did make me realise that pension scheme administrators are likely to come across quite a lot of somewhat dubious requests and will no doubt be familiar with the odd ‘wheeze’ like this. The problem is that when a financial adviser incorrectly tells their client that they can reduce their tax bill, the scheme administrator or pension trustee will say that the practice is not permissible and the member will think they are being obstructive. In the process, everyone involved has had their time wasted and no-one ‘wins’!

Having said that, I’m also aware that there are legitimate options that should be considered when applying the new regime. If we take the case of a member where the fund is below £10,000, the small pot rules do apply, and so the taxable element can be taxed at basic rate tax ie 20%. Alternatively a request to cash in benefits could be treated as an Uncrystallised Funds Pension Lump Sum, or UFPLS (that catchy term!) in which case the benefits are taxed at marginal rates, and so could be 40% or 45%. Although members who are basic rate tax payers can then claim back the tax, this is messy. From the Trustees’ and administrator’s perspective there are more disclosure regulations to be complied with for an UFPLS and so administrators should pay benefits under the small pots rules when they can.

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