Help-inverse commutation, PCSPS classic

Liloly

I am a former Civil Servant and as part of my retirement planning I intended to take my preserved pension from age 55 next year on an actuarially reduced basis.
I recently obtained the relevant figures and had intended to convert the whole of my lump sum to extra pension to make up for the reduction for taking it early.

On reading through the declaration on the payment form, there is a section on recycling of pension lump sum.
As the notes were not clear I phoned the Inland Revenue for guidance and they have told me that as my lump sum is more than £15,000, that if I use more than 30% of it as inverse commutation to increase my pension, a charge of 40% plus a possible surcharge of a further 15% will apply to the whole of the lump sum which is approximately £20,000.00.
This would mean a tax bill of up to £11,000.00 on the basis that my pension lump sum would now be treated as an unauthorised payment.

My reduced pension is £5056 pa. The inverse commutation would have added approximately a further £900 pa to this and I have planned this for many years with the intention of maximising my income to the fullest extent for retirement as the income is only modest.

Needless to say, it would be ridiculous for me to now go ahead and do this as the penalty would far outweigh any advantage.

Has anyone else had experience of this? There is a thread from earlier this year where someone said this rule is not relevant to inverse commutation but I can find nothing official to contradict what HMRC have told me.

My retirement plans feel as if they are in ruins now.

kidmugsy

My instinct is not to believe what they told you. In your shoes I would write to them, hoping that a written reply from them would be more carefully considered.

I hope the expert cavalry will be along soon to shed more light on this.

xylophone

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm09208020.htm
What you are proposing does not seem to be recycling as defined here?
Check with your scheme administrator?

sleepless_saver

Here's the HMRC technical guidance: http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104900.htm

bigfreddiel

i was considering inverse commutation on my lumpsum of approx £25k in the same scheme - classic

it's not recycling so no tax problems but the commutation rate isn't exactly brilliant - 5% roughly if you're 62 and married

at 55 it will be far less about 4.5% roughly - take the lumpsum, get yourself 4% in varying accounts so you can spend say £1000 per annum while what remainsof your lump is earning interest - its not exactly rocket science - just do the sums for yourself

fj

sleepless_saver

bigfreddiel wrote: »

it's not recycling so no tax problems but the commutation rate isn't exactly brilliant - 5% roughly if you're 62 and married

fj

I'm trying to get my head round this for my OH - is that not quite a good deal? It's an index linked joint pension of £500 per £10000 commuted compared with around £330 per £10000 for a 3% cap joint pension. Or have I misunderstood?

kidmugsy

bigfreddiel wrote: »

take the lumpsum, get yourself 4% in varying accounts so you can spend say £1000 per annum while what remainsof your lump is earning interest
fj

Geeze, how do you do that? 4%? Index-linked presumably?

rpc

kidmugsy wrote: »

Geeze, how do you do that? 4%? Index-linked presumably?

4%, index linked and cast-in-stone-rates-never-change in order to get a fair comparison. I've not seen a savings account like that...

Liloly

Thanks to everyone who has replied so far.

The consensus of opinion here points to it not being recycling however unless I am given an assurance by either HMRC or the pension scheme administrators I cannot risk doing inverse commutation as the potential risks are too horrific.

From HMRC website;
Recycling

You shouldn't 'recycle' your lump sum by using it to pay contributions to a pension scheme. If you do your lump sum will no longer be tax free.

Then technical guidance at RPSM09208020 gives 6 bullet points which the person from HMRC went through with me and said I would satisfy each one leading to an unauthorised payment.
He said as I have not paid into the scheme for the last 15 years (not possible as it was frozen when I resigned) any payment at all would be considered significant and that the lump sum would be treated as a pension contribution.

Also from HMRC website;

The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax relieved, contribution into a registered pension scheme. The most straightforward example of recycling is that of a member arranging to receive a pension commencement lump sum with the intention of investing it as a tax relieved contribution into the same or another registered pension scheme.

Then further along there is this;

Pension commencement lump sum payments are not caught if they are paid as part of an individual’s normal retirement planning.

I don't see how systematic exploitation of the tax rules comes into what I intended to do as no further tax relief would be involved.

I have emailed the scheme administrators but they can take up to 4 weeks to reply.
I have also written to my MP.

I will post back once I have clarification.