Pension related tax advice needed

redbuzzard

I've searched the forum for this but can't find anything relevant.

My 'problem' is that I am worried that I might get penalised for pension recycling. I hasten to say I am not guilty, because it was not pre-planned, but I don't know how I could prove that to HMRC if challenged.

In June 2012 (just after the beginning of the tax year) I was made redundant at 59. I was paid 6 months in lieu of notice, and a redundancy payment. I was also paid a bonus in August 2012, so it turned out to be quite a good year, apart from the loss of job!

I decided pretty much there and then that I should make a big, probably final contribution to my SIPP in the 2012-13 tax year, because I might actually end up not working at all or earning a much smaller salary. I could also get higher rate tax relief.

I initially intended to leave it until near the end of the tax year to see how things panned out. But in December there was talk that Osborne might reduce the annual allowance, so I made a SIPP contribution of £47,500 just before the mini budget, taking my total contributions for the tax year to just short of the £50,000.

I don't plan currently to touch the SIPP until 65.

This year, in May, I shall be 60 and a deferred occupational pension from a job I left in 1998 becomes payable. It's about £8,000 a year and I don't intend to commute any of it as it's final salary based and much better taken. However, I also have about £50,000 of AVCs linked to it. £45,000 of that could be used to make up the 25% tax free lump sum. This would be a very sensible idea, as the additional pension alternative is paltry, being based on current annuity rates (the odd £5,000 has to buy an annuity - they won't let me transfer it separately).

My concern is that HMRC might construe that I have planned to recycle the lump sum of £45,000 by anticipating it with the £47,500 SIPP contribution. Apparently they can levy a tax charge of up to 70%.

In my defence -

- I certainly didn't plan it, I hadn't given detailed thought to the forthcoming pension in May when I made the SIPP contribution, and I wasn't sent the figures until January.

- I have been in the habit of making one-off SIPP contributions since 2008-9 when I not only realised that my personal pensions were seriously inadequate but the company gave notice it was canning the existing DB pension scheme.

SIPP contributions - gross

2008-9 - £40,000
2009-10 - £30,000
2010-11 - £20,000
2011-12- £nil (I decided to max the ISAs as the annuity rates are so bad, don't think I got a bonus either.)
2012-13 - £47,500 (last chance, got a bonus and redundancy pay, stopped worrying about annuity rates and decided I could do drawdown)

I don't "need" the £45,000 lump sum to live on - I and my wife have other savings as well as her OAP and the £8,000pa to live on until 2018. But I would be mad not to take it in preference to an RPI annuity of £1200pa or a level one of about £2200.

So

- might I be at risk of being clobbered?

- any suggestions as to where to go for professional advice?

- is it advisable to ask HMRC?

Sorry for the long question. Thanks in advance for any thoughts.

mania112

I think you'll be fine.

Your recycling wasn't pre-planned and the funds invested in the pension were not sourced from the Lump Sum.

If asked you can honestly say the contribution was made from a redundancy payout - and you would have the documentation to prove that.

EDIT: And the best place for professional advice would be to find a local IFA @ https://www.unbiased.co.uk

jamesd

Do not contact HMRC about this! That would increase your risk, not decrease it.

The most relevant contribution made so far is the 2012-13 one and you have a clear reason for making that which is unrelated to recycling the pension lump sum. This is pretty clearly not directly related to the SIPP lump sum but rather to bonus and redundancy pay.

redbuzzard

Thanks for the reply mania112.

That's what I wanted to hear of course. And I hope that the obvious link to the redundancy, notice and bonus payments plus the fact that I have made significant contributions albeit inconsistently since 2008-9 will help if it comes to it.

My reason for being fearful is that in objective terms I am likely to meet the criteria used by HMRC (significant increase in contributions of >30%, >1% of lifetime allowance, >30% of lump sum) in fact the only one I definitely don't tick is pre-planning - but HMRC 'infer' that from the evidence. Other than just denying the pre-planning, my best evidence is probably the redundancy 'windfall' (genuine windfalls are considered OK, but the examples they use are inheritances and lottery wins!)

In truth, all I wanted to do was to get the max into the SIPP to build it up as much as possible for 2018 - I can get there from here without fatal damage to the savings, with or without the lump sum.

I'm not sure an IFA is the obvious choice for advice - are they tax experts too? I already have an opinion - what I need is something definitive if possible. Worst case is an IFA charges me £500, tells me not to worry, and then I get a £30,000 tax charge with no recourse!

Edit: Thanks also to jamesd. That was why I asked the question about HMRC first :-)

kidmugsy

A few years ago I had built up quite a file on recycling. One thing I remember from it was the statement (from one of the pension companies) that HMRC wasn't interested in penalising people who were making ordinary retirement provision. It also implied that HMRC weren't interested in modest sums (which I suspect is how they would view yours).

I inferred that the law was there to stop wealthy people bagging a TFLS at 55 and recycling it into a pension while finding another high-paying job to take them through for another ten years. That there is a substantial number of such people who must be deterred from such behaviour is probably a silly fantasy of Gordon Brown's, but the consequent law has certainly caused plenty of people some unnecessary worry.

The best source of info that I found at the time was the L & G website, so it may be worth your while looking around at the websites of the big insurers.

ChampionBob

In the main I agree with the replies posted.

While it could be argued that you have a duty to report any concerns to HMRC, if there was no premeditation on your part and you have acted in good faith throughout, then I don’t feel this obligation falls on you.

To be clear, taking a Tax Free Sum from a pension fund and then investing it back into a pension is not permitted by HMRC. However you have not done this.

I would slightly disagree with kidmugsy in that, these days a £47,500 pension contribution is not a ‘modest sum’. It is almost the entire annual allowance. In the current economic climate such a contribution coupled with other activity around your pension funds could cause HMRC to have a look, but I nevertheless agree - unlikely.

Just in case I would make sure I had a clear audit trail of the various ins and outs and alongside that create a narrative that explained what was happening at the time and more importantly what your thoughts were at the time that caused me (you) to take the action that I (you) did.

redbuzzard

Thanks Bob. Seems sensible. I am compiling a record of my annual contributions, to show that the 2012-13 contribution was not inconsistent with what I have been doing to "fix" my pension shortfall since 2008-9 - I have never made regular contributions, only lumps when I felt I could put money beyond reach.