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Lump sum recycling
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srcandas
Posts: 1,241 Forumite

This was discussed /raised in a previous thread but as it might be useful to others here goes.
My partner has just started (March 2012) a SIPP (previously no pension contributions of any kind) and as her state pension qualification is at best dubious we need in the next 10 years to build a fund that would give her a pension to at least make best use of her future personal allowance.
I independently want to crystalise my Pru pension and take a lump sum of £17500.
It has been suggested here that I may get accused of recycling the lump sum (i.e.paying it into my wife's SIPP).
I spoke to HMRC helpline and they put me through to HMRC pension's helpline.
I was put through to a specialist with whom I had a long conversation and my deductions were:
I don't of course have this in writing but it assures me that I do not need to be concerned. I offered that I could use the total tax free lump to pay a mortgage and thus have 'proof of use' but he didn't suggest this was necessary.
Well hope that helps anyone concerned but as always please do not sue me if you get stung. I'm only doing what I can to be honest but not miss-out :beer:
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My partner has just started (March 2012) a SIPP (previously no pension contributions of any kind) and as her state pension qualification is at best dubious we need in the next 10 years to build a fund that would give her a pension to at least make best use of her future personal allowance.
I independently want to crystalise my Pru pension and take a lump sum of £17500.
It has been suggested here that I may get accused of recycling the lump sum (i.e.paying it into my wife's SIPP).
I spoke to HMRC helpline and they put me through to HMRC pension's helpline.
I was put through to a specialist with whom I had a long conversation and my deductions were:
- We (HMRC) don't focus on recycling legislation. It was bought in by a government more to prevent the finance industry creating products to exploit a loop hole.
- It would be up to us (HMRC) to prove you had recycled based on you meeting all 6 conditions stated on the HMRC website.
- As your wife/partner works we would not question this within the limits allowed (£3600 or amount based on salary).
I don't of course have this in writing but it assures me that I do not need to be concerned. I offered that I could use the total tax free lump to pay a mortgage and thus have 'proof of use' but he didn't suggest this was necessary.
Well hope that helps anyone concerned but as always please do not sue me if you get stung. I'm only doing what I can to be honest but not miss-out :beer:
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I believe past performance is a good guide to future performance :beer:
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Comments
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Thanks. That's the general impression I have of it as well.0
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Why would you want to take a tax-free lump sum, only to pay it back in to a pension again? I don't see the point of that. What do you gain by it?0
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I'm with Ed,
I take it you have £70k in your Pru pension, which I'm sure you are aware results in a fairly small amount of income via an annuity. Why would you want to give this to your wife to buy a small annuity with?
You could always put it in investment ISA's if you don't want to spend it and invest in some High yield bonds and generate a good income from it that way.0 -
why doesn't get a state pension forecast so her state pension isn't 'dubious'
why much does she earn?0 -
Ed and Daniel you recycle tax free money to get an extra 20% (not that that is what I am doing
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Man takes £17500 tax free. (this money has already benefited from a 20% tax addition).
Woman pays £17500 tax free into a SIPP. The tax man adds 20% or £3500.
When woman takes pension it is tax free as she is not using all her personal allowance.
The part of the initial investment thus processed has benefited from two tax allowance additions and the money has effectively been transferred from one person to another to make a further tax gain.
clapton because she has 28 years employment in Spain and the system there is radically changing, is subject to Spain going bust (massive cuts in state welfare), and might well be paid in a very deflated peseta sadly her pension position will remain dubious for some time to come.
:beer:I believe past performance is a good guide to future performance :beer:0 -
ok, 17.5K goes into a pension, you end up with £21875 in the pension. You can then take an income of what, 4.5% from an annuity which is 984.375 a year, which you pay tax on ( and if under the SPA) NI too.
Lets say just income tax, you get net £787.50
Which is exactly the same as taking an investment ISA and withdrawing 4.5% of it a year.
The only benefit is that you can get the investment growth on the 25% extra tax relief, but then you lose out on access all of said money.
Also I have a little problem with you blatantly advertising that people should break the law. What's worse is that your potential gain is minimal - there are much better and less dodgy ways of making money.
I don't understand why you are fiddling with the tiny parts of your family finances, what is more important is seeing if she can pay class III national insurance to get some years into her state pension eligibility and looking at the rules for spanish ex-pats.
It's all household money, equalising estates doesn't work any more as transfers between spouses are completely tax free as long as she has elected for the UK to be her domicile of choice.
Also, remember the GROSS contribution is limited to salary.0 -
Daniel_Elkington wrote: »ok, 17.5K goes into a pension, you end up with £21875 in the pension. You can then take an income of what, 4.5% from an annuity which is 984.375 a year, which you pay tax on ( and if under the SPA) NI too.
You don't pay NI on pension income.Lets say just income tax, you get net £787.50
The OP has already explained that his partner is likely to be a non-taxpayer so no tax to pay.Also I have a little problem with you blatantly advertising that people should break the law. What's worse is that your potential gain is minimal - there are much better and less dodgy ways of making money.
Partner works so pays £17.5k of her own earnings into her own pension.It's all household money, equalising estates doesn't work any more as transfers between spouses are completely tax free as long as she has elected for the UK to be her domicile of choice.
Equalising pension income as opposed to one partner being top heavy and paying more tax does work and is perfectly legal. Far better to have 2 people with £10k taxable income each than have one person with £20k.
Surely doing joint retirement planning should be what any IFA is looking at?0 -
Daniel_Elkington wrote: »ok, 17.5K goes into a pension, ......................
Daniel no one said it was god's gift to higher pensions for all. But in the right circumstances there is a gain to be had; the government saw it as an unfair gain, and passed legislation to stop it.
In its simplest form:
An FA gets a client. The Client has a £100,000 pot and wants to buy an annuity.
The going rate at the time is 5% so £5000 a year.
But the FA gets smart and says hang on; your wife has three years to go to retirement and earns £20000.
How about we take your 25% lump sum (£25000) and give it to your wife who puts it into her SIPP.
At the end she has £25000 paid in and a free gift from the government of £5000 for putting it in a SIPP.
So the original annuity is for £75000 but now the wife buys one for £30000. So in total £105,000. (ignoring growth)
This the government declared unfair and sealed the loop hole. But according to my man at HMRC the intention was to stop the industry from creating products based on this and not to pick on individuals who under certain circumstances might appear to be intentionally recycling but in reality were not.
Nothing more deeper to it than that :beer:Daniel_Elkington wrote: »Also I have a little problem with you blatantly advertising that people should break the law.
And I do not promote illegal activity and you should be careful with such accusationsI believe past performance is a good guide to future performance :beer:0 -
Daniel_Elkington wrote: »You can then take an income of what, 4.5% from an annuity which is 984.375 a year, which you pay tax on ( and if under the SPA) NI too. ... Lets say just income tax, you get net £787.50 ...
Which is exactly the same as taking an investment ISA and withdrawing 4.5% of it a year.Daniel_Elkington wrote: »The only benefit is that you can get the investment growth on the 25% extra tax relief, but then you lose out on access all of said money.Daniel_Elkington wrote: »Also I have a little problem with you blatantly advertising that people should break the law.This the government declared unfair and sealed the loop hole.0
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