Lump sum recycling

atush

Daniel, there are a lot of factual inaccuracies in your last post- I thought you are an IFA? Maybe I am remembering wrongly.


In any case srcandas, you really need to speak to DWP about her spanish contribs and have them transferred to the UK scheme under UK law if and as applicable is she is now resident here.

and Do consider making your union legal (am I remembering rightly you aren't married yet?) to make the most of tax, asset tranasfers and inheritance between the two of you. As laws/taxes are different depending on legal marriage or not.

Daniel_Elkington

http://valencia.angloinfo.com/countries/spain/pensions1.asp

Article about finding out state pension entitlement in Spain.

http://ukinspain.fco.gov.uk/en/help-for-british-nationals/living-in-spain/pensions-benefits/working-in-spain/state-pension

This one is the UK Govt. site on the same.

Most sources say the full pension is for 35 years and is about 862 euros a month. So 30/35 for this, but I'm only guessing here.

This would be brought into the uk and tax paid on it, so an income from this and a small amount of uk state pension too would probably take her over the threshold for income tax.

As well as annuitising a pension you'd be looking at tax via self assessment.

http://www.hmrc.gov.uk/manuals/dtmanual/dt17550+.htm

This website may help too with the spanish income situation as there is a double taxation treaty between spain and the UK.

If she has all this income and any other income then she may pay NI. I don't have a factfind and so am painting a worse case scenario to illustrate a point. I am comparing apples and pears here true, a fairer comparison would be drawdown and annuity. The point is that the actual net amount gained by doing something that HMRC could 'enquire' about is practically nothing, why try to bend the rules when you don't really need to?

It's not as bad as what Jimmy Carr has been up to, but still a bit inethical.

From the looks of things it seems like she will pay Spanish income tax on the spanish state pension, not sure whether spain actually tax their state pension

Failing that go and see an international financial adviser, there are plenty for UK/Spain expats.

Finally, it is against the law to advertise pensions recycling.

If however you were to transfer the assets across to her (I'm assuming her SIPP provider is actually a platform) she could invest in a collectives account and an investment ISA on the platform within the same investment portfolio and migrate assets herself into the pension tax wrapper if proper analysis and due diligence would prove that to be the most appropriate course of action over the course of many years.

jamesd

Daniel_Elkington wrote: »

If she has all this income and any other income then she may pay NI.

Please provide a link to any HMRC or other official source that says that NI is payable on UK pension income. You can still pay NI on income from working until state pension age, though.

Daniel_Elkington wrote: »

why try to bend the rules when you don't really need to?

Please stop falsely claiming that recycling is bending the rules. HMRC is completely clear that it is permitted. srcandas has checked directly and you can yourself by doing nothing more difficult than reading HMRC's pages about the rule that sometimes limits it. You might start by looking at the two pages where HMRC sets out the pre-requisites before the rule applies, the first at RPSM04104920.

Daniel_Elkington wrote: »

It's not as bad as what Jimmy Carr has been up to, but still a bit inethical.

It's entirely lawful and proper. It is not any form of circumvention or avoidance scheme and simply recycling without having planned it in advance is enough to avoid doing anything that has any chance at all of being caught by the rule.

It's not a free gain. To get the gain requires losing access to the capital and placing the income being generated within the scope of the pension rules, restricting how much can be taken out.

Daniel_Elkington wrote: »

The point is that the actual net amount gained by doing something that HMRC could 'enquire' about is practically nothing

Lets consider how high your threshold for "practically nothing" seems to be with an example.

Higher rate tax payer recycles £10,000 target of pension value* from a lump sum. This amount is too low to be affected by the recycling rule so there is no legal impediment to doing so. For ease of calculation I'll assume that they do the recycling via a salary sacrifice pension scheme with no employer addition.

They now have £10,000 in the pension pot. They could instead have taken the income and had £5,800 to put into a S&S ISA after tax and NI, which is their net cost of getting the £10,000 into the pension pot.

Now say the individual is 55 to avoid working out the time value of money. They take a 25% tax free lump sum from the new pension, receiving £2,500 back. They now have £7,500 in the pension pot at a net cost to them of £5,800 - £2,500 = £3,300. That is, the amount in the pension to produce an income is approximately 2.28 times their final cost to get it there.

So lets move on to income calculation. The direct S&S ISA with the same £3,300 cost has £3,300 in it. The same cost in the pension has £7,500 in it. Lets say that they use investments which produce a return of 5% and that this is lower than the applicable GAD limit.

The pension income, after higher rate tax, is £225 a year. If they waited until after retirement and becoming a basic rate tax payer it is £300. The tax free ISA income from the same investments is £165 a year.

So, higher rate working and in retirement is getting 36% more after tax income. Higher rate working and basic rate in retirement is getting 82% more after tax income.

I'm not sure about you, but the concept of 82% increase in income may be attractive to quite a lot of people. Same for 36%.

The gain at basic rate on the way in is lower, though still quite close when salary sacrifice is used, but this should have more than amply demonstrated that consumers should not ignore the potential value of recycling if their objective is increased income.

And of course recycling is not limited to just £10,000, it's just a convenient round number. Systematic use of lump sum and income from a pension recycling can produce significant benefits where the objective is to increase income at the cost of reduced capital availability.

For added amusement value, now assume that the individual has a guaranteed income of at least £20,000 a year and can use flexible drawdown to move the money into an ISA. They will pay say 20% on the £7,500 of pension capital, leaving £6,000 in the S&S ISA. Now they have £6,000 generating tax free ISA income whereas they would have only £3,300 on the same net cost basis if they had not involved a pension. It's probably quite clear that they have close to twice as much capital now available to them as if they had not used the pension. So depending on an individual's circumstances, this can also be a way to increase, instead of decrease, the amount of capital available.

And, even if the rule would apply to a lump sum, the main limit on income recycling is the £50,000 a year pension contribution limit. So, with no recycling rule applying to income, you can start recycling income at age 55 while continuing to work and make pension contributions to improve your position.

Daniel_Elkington wrote: »

Finally, it is against the law to advertise pensions recycling.

Please provide a reference for this. The purpose of the rule is "to prevent the systematic exploitation of the tax rules for registered pension schemes" so it would not surprise me if IFA firms aren't allowed to advertise it. I just don't happen to know where in regulation or law - the two are different - you're thinking of is.

A caveat on calculations, it's a bit late for me now and I'm tired, so it wouldn't surprise me if someone finds a glitch somewhere in them. If you do please let me know and I'll make appropriate corrections to the calculations.

*I use the wording pension value here because as the later calculations show, they don't actually need to spend £10,000 of a lump sum to be treated for pension purposes as having contributed £10,000.

srcandas

Daniel I appreciate the effort you have put in but you have made assumptions regarding spanish tax, spanish pensions and the circumstances being looked at here which are simply wrong. Clearly the conclusions drawn from incorrect assumptions are going to help no one.

I was going to respond in detail to your post but I think James has covered the main points.

Thanks James :beer:

jem16

Daniel_Elkington wrote: »

If she has all this income and any other income then she may pay NI.

All of this income that you talk about is pension income.

I have received a pension for almost 10 years and I am still way off my state pension age. I have paid no NI at all on it. Are you saying that I should have? As jamesd asks - could you provide a link that says I should?