Following my posts Money tip #67 – Make pension contributions on behalf of your spouse and children and get tax relief even though they don’t pay tax! and Money tip#68 – How you could be entitled to take your entire pension fund as a one-off cash lump sum they lead on to an interesting opportunity for those aged between 60 and 75, or indeed those who have a spouse who falls into this age bracket.
First off, read the aforementioned posts. Now, you might be able to see that a non-earner with limited pension provisions could pay £2,808 into their pension and receive an immediate 20% uplift, and as long as they are aged between 60 and 75, they could then under the rules of triviality encash the pension. If they are a non-earner then all of the lump sum they receive would be tax free, so netting them a free £702 on the tax man! The beauty is that the money is back in their pocket for them to do with as they please.
In theory, they could fund up to the current trivial commutation limit of £18,000 over a number of tax years and net an even bigger lump sum. Now obviously there is drawback here. How many pensioners, with no earnings and no pension provisions have a few thousand pounds to flush through a pension in this way. Not many. But their working spouse might!
If you are income tax payer with a spouse who is not working you could in theory build a pension pot in their name, receive the tax relief, and they could then take the pension under the rules of triviality, assuming they qualify.
Now, I am aware that I have previously written the post Money tip #26 – Never make an investment just for tax reasons and I still stand by this. HMRC could change pension legislation at a drop of a hat and close the above door while people are walking through it. But I am just pointing out an apparent legal quirk of the system that some people are exploiting.