A tax cut disguised as a Polar Bear

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There is a wonderful Blackadder line that applies tonight.

“You are a girl with as much talent for disguise as a giraffe in dark glasses trying to get into a ‘Polar Bears Only’ golf club.”

Today George Osborne blew a dog whistle over tax cuts and you really have to be quite deaf not to hear it.

But George, he’s a canny one. He dressed the tax cut up as an egalitarian liberation of the poor suffering pensioner forced by the government to purchase an annuity from the nasty insurance companies.

OK firstly these days few people are forced to purchase an annuity. Pension flexibility exists across the board now,and few are actually forced into buying one nowadays.

What George has done (and this has to be welcomed) is he’s simplified that process and various tax regimes.

But in doing so he’s effectively allowed customers to draw down as much of their pension as they like and only pay marginal tax rates on it. This is going to create a wonderful opportunity for the wealthy and well advised.

Anyone can now invest in a pension, and effectively print money. Take this simple example:

Pay in £100 to a pension, it will be increased to £125 through tax relief. You then immediately withdraw it, or better, withdraw it in the next tax year.

Pay in £100
Plus relief £125
25% is tax free (£31.25)
75% is taxed at 20% (£93.75) so giving you £75 after tax

Add the two together and you’ll end up with £106.25 for a £100 outlay!

But if you are a higher or highest rate taxpayer at the point of paying in your £100 you’ll receive all of the benefits above AND an immediate tax cut of 20% (25% for a upper rate payer) of the amount you have invested!

An additional tax cut of £20 or £25 for 40% or 45% taxpayers.

Put it another way a highest rate taxpayer can pay in after their relief £75 and get £106.25 back, that’s a tax payer funded bung of 41.66% of the amount invested.

Of course you will need to time your payments in and out, but that’s not exactly difficult for the wealthy and well advised, that’s what they pay their advisers for! Yesterday’s announcement gives advisers and their clients some serious latitude to take the tax payer for a ride.

Imagine the opposition and media response to George Osborne openly announcing a large tax cut for the wealthy and well advised? Imagine the catcalls of horror from people struggling to meet their day to day living expenses?

Well he just did.

Question is how long before everyone at the Polar Bear golf club realises that there is someone sitting in the corner of the clubhouse with a really long neck, covered in spots and wearing dark glasses and has a really big grin on his face?

Tax treatment depends on individual circumstances and can change in the future.

No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.