When you take money from a pension, you are entitled to 25% tax free, and the remaining 75% is liable to tax. For that reason, many people only take a 25% tax free lump sum.
However some pension holders have been taking a taxable income from their pension fund and are reinvesting it BACK into their pension. Sounds a bit odd?
The reason they do this is to create a second tax free lump sum.
The tax the customer pays on the money they take out of their pension is immediately reclaimed the minute they pay it back into their pension fund (*). This is known as income recycling. In effect, the customer has taken a sum of money from one pension pot, and put exactly the same amount of money into a new pension pot. When they take money from this second pension pot, they will be entitled to a 25% tax free lump sum, from in effect the same amount of money.
There is a limit to how much money anyone can pay into a pension and get tax relief, and this is currently £40,000. However for people who took advantage of the new pension freedoms and took more than their 25 percent tax free cash (i.e. some taxable income), then the current annual contribution limit is still £40,000, but you will be limited to only putting £4,000 into personal pension arrangements. .
However even just reinvesting £4,000 per year from your pension, back into a second pension, over the next 10 years would see you eligible for a further £10,000 tax free cash in 10 years time (**).
If you would like to know about income recycling, creating a second tax free lump sum, or just taking your tax free cash lump sum via a flexible drawdown contract, then please get in touch. You can visit our website www.flexi-access-drawdown.uk or call us on 020 33 55 4827. |
