Anyone in their fifties or approaching retirement who pays higher rate tax now but who expects to take a drop well into the basic rate tax band after retirement, could, if they had the cash, put away up to £40,000 in a tax year (the current annual limit) into a pension plan. After April 2015, they would be able to cash it in.
The upside is that tax relief turns a £6000 contribution into one worth £10,000 in the pension, thanks to 40 per cent tax relief. When cashed in, the saver needs to be on basic rate tax, paying 20 per cent, to benefit. After taking 25 per cent as a lump sum, the tax bill would then be £1500, giving a total £8500 return for the £6000 contribution.
The catch is that any cash withdrawn counts as annual income and could tip the taxpayer back into the higher rate band.