3 ways to boost your pension you've never heard before

Find out how to get more out of your retirement savings with these three little-known pension tricks.

Pensions can be very complex creatures. The whole pension regime is an intricate web of rules and regulations. But discovering obscure loopholes can benefit you greatly. Here are three of the best tricks you may never heard of before, but are definitely worth knowing:

1. The immediate vesting trick

Immediate what?! Immediate vesting is a way of topping up your pension and then using it to buy an income for your retirement straight away.

Err...what's so great about that?

An immediate vesting personal pension (IVPP) can be opened with a lump sum paid out of your own pocket or by transferring your existing pension scheme(s) into the plan.

This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.

As per the normal rules on tax relief, if the contribution is paid out of your own cash, basic rate taxpayers will enjoy a 20% uplift to their contribution once tax relief has been added, while basic rate taxpayers will get 40% tax relief with the extra 20% claimed through their tax return.

For example, if you transferred a lump sum worth £10,000 and you're a basic rate taxpayer, you'll get an extra £2,500 top-up from the tax man. So, an IVPP is an easy way of boosting your pension quickly with tax relief on any spare cash you have just as you reach retirement.

The downside is that you can only take 25% of the IVPP as tax-free cash. You then have to buy an income (called an immediate vesting annuity) with the remaining 75%.

What other factors should you consider?

Your contribution to an IVPP plan can't be more than 100% of your earnings for the tax year in question.
You must be at least 55 and under 75 when you buy an IVPP.
The amount of income you receive will be based on a number of factors including: the value of your IVPP when it's converted into an income using an immediate vesting annuity, the annuity rates at that time, how often income is paid to you, your age and gender, and the options you choose for your annuity such as providing a spouse's pension and inflation-proofing your income.
Your income will normally only last as long as you do, unless you have paid for a spouse's pension or a guarantee that it will pay out for a minimum period even if you die before then.
You should always check the income you'll get from an immediate vesting annuity is available at competitive rates before you commit to an IVPP.

2. The tax-free cash and purchased life annuity trick

I know it's not the most snappily titled trick in the book but listen up...

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A purchased life annuity (PLA) converts a lump sum of non-pension cash into an income. It works just like a standard annuity by guaranteeing to pay out for the rest of your life.

Income from a standard annuity is taxed based on normal income tax rates, but the tax treatment of PLAs is much more generous.

Since you're using your own money to buy the PLA, it's deemed a return of capital and therefore part of the income you get back is tax-free. The remainder is taxed at 20% for basic rate taxpayers and 40% for higher rate taxpayers.

The trick with this little-known rule is to take the 25% tax-free cash from your own pension plan and use it to buy a PLA where it will provide a guaranteed income - the majority of which is tax-free - throughout your retirement.

What factors should you consider?

Once you put your tax-free cash in a PLA you sacrifice your capital to the annuity company. If you don't survive for long after retiring most of your capital will be lost (unless you buy a spouse's pension or a guarantee for a minimum period).
That said, if you do survive long enough, your PLA will pay out more in total than your original capital amount. For example, if you bought a PLA with tax-free cash of £50,000 which pays an annual income of £3,435 (an annuity rate of 6.87%) you'll break even after 14.5 years. Any subsequent income will mean you're getting more out of your annuity than the capital you paid in.
Once again you must make sure the income from a PLA is provided at competitive rates.

3. The triviality trick

Triviality rules allow you to cash in your pension fund and receive a lump sum in return. However, triviliaty rules are pretty strict, so it's not an option open to everyone.

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For one thing, it only applies to very small pension pots where the total value of all your pension schemes is below 1% of the lifetime allowance. That means, this tax year, you can only swap your pension for cash if it's worth £18,000 in total or less. Fom 2012 this link to the lifetime allowance is to be removed, so irrespective of what happens to the lifetime allowance, the threshold will continue to be £18,000.

Essentially, this trick is there to allow you to bypass annuities altogether if you don't have a large pension. This means you won't have to sacrifice your pot to an annuity company where it's usually lost on death.