Tax free lump sums plus recycling

redskink

I have the misfortune of being made redundant soon but the upside is I am 55 and can retire early. I have a very specialised job and will find it virtually impossible to work again. I have DB and DC scheme with the same employer DC contributions come from my bonus which is variable.

I want to make a 77k payment into a SIPP from my redundancy and my company have calculated I have enough allowances left to do that. In my DC pot I will have 38k from routine regular payments over the 6 years the scheme has run plus a £35k avc made dec 2010. I will be made redundant end June 2012.

I want to take a tax free lump sum when I retire without invoking recyling rules. As I see it the options are

(1) Take 15k which is below 1% of life time limit which should be okay
(2) Take 38K regular payments (I do not have enough savings that I could make the 77k payment together with this lump sum)
(3) Try to take the regular payments plus the AVC but I do not think the AVC has been in long enough for HMRC to allow that.

Any views

kidmugsy

I don't see how using your redundancy money to contribute to a pension bears on the question of recycling your tax free lump sum. Can you clarify that and other points?

kidmugsy

Hold on: do you mean that you want to contribute to the SIPP in this tax year, not 2012-13?

Loughton_Monkey

I don't see what recycling has got to do with it.

From what I can see, your biggest problem is the date of retirement - June 2012. This means that your taxable earnings from employment for tax year 2012/13 will consist of 3 month's salary. Now if this will be £77K plus whatever equivalent extra salary to support 'routine' pension payments, then that's fine. But your current pension values do not look commensurate with a salary of £300K plus.

Personally, I would look to 'rape' any savings I have and try to put in as much as I could this financial year. Unless you get another job, the amount of pension contribution you are allowed to make next tax year (when you ironically will have the £77K) might be very minimal.

jamesd

You want to make a payment from redundancy money into a SIPP. That is not pension commencement lump sum recycling.

Pension commencement lump sum recycling is taking a pension lump sum and then investing that lump sum into a pension to get a second chunk of tax relief. The rules also cover indirect ways of doing it, like putting the money in then relying on the lump sum to get back the money. For recycling to be barred it must breach all six of the rules there and it's easy for you to avoid breaching at least one of them.

Circumstances where the recycling rule does not apply

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.

The fact that you would be entitled to a larger lump sum after sacrificing the redundancy money does not constitute recycling. It's one of the recognised cases where it's just normal planning.

It's fine to pay the redundancy money into a pension and the first £30k is tax free anyway, so it may not make sense to pay the first £30k into a pension. You can look up the full rules for how redundancy payments are taxed. You do need to check that the money or £30k of it counts as a proper redundancy payment, some payments might not.

I don't know where £300k comes from.

So, why do you think that the recycling rule is invoked in your case?

Say you did want to do some recycling. Lets look at the numbers you start with. You have £38k + £35k so the largest possible lump sum you could take in advance of the new contribution is £18.25k. The anti-recycling rule exempts payments from lump sums up to 1% of the lifetime allowance, which means £18k is exempt. So if you have enough allowance left (the £50k a year, allowed to use unused amounts in later years rule) you could take a lump sum of £18k and recycle it without it triggering the anti-recycling rule. You'd leave the £.25k in an uncrystallised pot that you pay the new contributions into.

Next rule would be the 30% of the lump sum being recycled rule, but no need to go there because 18k covers all you need to do.

In addition you could then take a 25% lump sum from the 77k redundancy money in the SIPP and from the £18k recycled money. That's £23.75k back in your pocket. There might be some risk that putting that into a pension would be considered recycling when considered in conjunction with the 18k already used. But the £18k allowance is per twelve months, so you just do this twelve months and one day after the first one. Since you are already planning for redundancy in June 2012 and it's only July 2011 now you can easily do the first lump sum now and the second one in July or August 2012 and avoid trouble.

So I see no reason for you to be troubled by the anti-recycling rules. You appear to be able to both put in the redundancy money and recycle all possible lump sums over a 12 months plus a few days period and avoid any chance that the recycling could qualify as barred recycling.

The £18k limit is based on the 2011-12 lifetime allowance of £1.8 million. In the 2012-13 tax year it will fall to £1.5 million. I assume, but don't know, that the recycling allowance will also fall. At least one allowance (triviality) will be remaining at £18k so if this difference matters you should seek clarification of what the limit will be.

Loughton_Monkey

jamesd wrote: »

I don't know where £300k comes from.

It came from me.

The proposition, as outlined, concerns paying £77K into pension in June 2012. That's 3 months into the tax year. I'm simply pointing out that his taxable earning for those three months (because there's no mention of another job or earnings) must be £77K or more. £77K for 3 months is about £308K per year. I doubt that he earns that.

This was why my point was to concentrate on contributing this tax year, so he could get tax relief on the £77K (assuming this is less than his taxable earnings).

jamesd

Only up to £30,000 of the prospective redundancy payment could be free of tax. The remaining £47,000 is taxable earnings in the year in which the redundancy payment is made. That would go a long way towards making it possible, though I do agree that it's good to get started this tax year, particularly if recycling is desired.

Loughton_Monkey

jamesd wrote: »

The remaining £47,000 is taxable earnings in the year in which the redundancy payment is made.....

I'll take your word for that. I was under the impression that pension relief come from 'income earned from employment' and that £30K+ redundancy payments were not 'income from employemnt' but compensation for loss of office. But I am no expert.

redskink

kidmugsy wrote: »

I don't see how using your redundancy money to contribute to a pension bears on the question of recycling your tax free lump sum. Can you clarify that and other points?

No I want to contribute from my redundancy in 2012/2013 tax year

There a two reasons I am worried. Firstly I made a large AVC in Dec 2010 I am concerned that HMCR could interprete I made the AVC just to take it out again 18 months later. That is not really related to the redundancy payment.

Secondly if I took out too much as a lump sum HMRC could say well you are merely taking out with one hand and putting in with the other ie the only reason you can afford to put in 77K is that you are taking a cask free lump sum out. Hence recycling.

Thanks for your interest and any advice!

redskink

Loughton_Monkey wrote: »

I don't see what recycling has got to do with it.

From what I can see, your biggest problem is the date of retirement - June 2012. This means that your taxable earnings from employment for tax year 2012/13 will consist of 3 month's salary. Now if this will be £77K plus whatever equivalent extra salary to support 'routine' pension payments, then that's fine. But your current pension values do not look commensurate with a salary of £300K plus.

Personally, I would look to 'rape' any savings I have and try to put in as much as I could this financial year. Unless you get another job, the amount of pension contribution you are allowed to make next tax year (when you ironically will have the £77K) might be very minimal.

No I do not earn over 300k I wish!!!!! The 77k comes from redundancy.

redskink

jamesd wrote: »

You want to make a payment from redundancy money into a SIPP. That is not pension commencement lump sum recycling.

Pension commencement lump sum recycling is "]taking a pension lump sum and then investing that lump sum into a pension to get a second chunk of tax relief. The rules also cover indirect ways of doing it, like putting the money in then relying on the lump sum to get back the money. For recycling to be barred it must breach all six of the rules there and it's easy for you to avoid breaching at least one of them.

What I am worried about is the large avc I made in dec 2010. This becomes an issue I think if I take too much tax free lump sum.



An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.

Actually I do not intend to put the lump sum back in an pension. The issue is how HMRC view the unusual AVC in Dec 2010 and how much tax free cash I can take!

The fact that you would be entitled to a larger lump sum after sacrificing the redundancy money does not constitute recycling. It's one of the recognised cases where it's just normal planning.

It's fine to pay the redundancy money into a pension and ]the first £30k is tax free anyway, so it may not make sense to pay the first £30k into a pension. ]You can look up the full rules for how redundancy payments are taxed. You do need to check that the money or £30k of it counts as a proper redundancy payment, some payments might not.

I don't know where £300k comes from.

Neither do I!!!!!!!

So, why do you think that the recycling rule is invoked in your case?

Say you did want to do some recycling. Lets look at the numbers you start with. You have £38k + £35k so the largest possible lump sum you could take in advance of the new contribution is £18.25k. The anti-recycling rule exempts payments from lump sums up to 1% of the lifetime allowance, which means £18k is exempt. So if you have enough allowance left (the £50k a year, allowed to use unused amounts in later years rule) you could take a lump sum of £18k and recycle it without it triggering the anti-recycling rule. You'd leave the £.25k in an uncrystallised pot that you pay the new contributions into.

Actually because I have a DB and a DC part of the same scheme I can take much more of 35+38 because of the DB pot adds to the DC pot with a 20X multiplier for the DB pension. I agree with you if I stick to the 1% rule which I am assuming is 15k next tax year (thanks for the links I will follow them up) there is no issue but I want to max out tax free cash stick in isas and get tax free income. If I leave it in a pension its taxable income. Core issue is can I extract more than the 1% life time allowance without getting into problems.

Next rule would be the 30% of the lump sum being recycled rule, but no need to go there because 18k covers all you need to do.

In addition you could then take a 25% lump sum from the 77k redundancy money in the SIPP and from the £18k recycled money. That's £23.75k back in your pocket. There might be some risk that putting that into a pension would be considered recycling when considered in conjunction with the 18k already used. But the £18k allowance is per twelve months, so you just do this twelve months and one day after the first one. Since you are already planning for redundancy in June 2012 and it's only July 2011 now you can easily do the first lump sum now and the second one in July or August 2012 and avoid trouble.

I cannot do this because I am not 55 yet unfortunately so I cannot start taking lump sums until 2012/2013 tax year but its a brilliant thought! I can use some of your principles however thanks a lot!

So I see no reason for you to be troubled by the anti-recycling rules. You appear to be able to both put in the redundancy money and recycle all possible lump sums over a 12 months plus a few days period and avoid any chance that the recycling could qualify as barred recycling.

The £18k limit is based on the 2011-12 lifetime allowance of £1.8 million. In the 2012-13 tax year it will fall to £1.5 million assume, but don't know, that the recycling allowance will also fall. At least one allowance (triviality) will be remaining at £18k so if this difference matters you should seek clarification of what the limit will be.

You obviously put a lot of effort into your comments and I am very grateful, definitely you gave me a different way of looking at it!

Had to take the links out as I am new otherwise the comments are original