Pensions and 25% tax free sum

dunstonh

The recycling rules are HMRC

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm04104900.htm

Like many HMRC rules they are open to interpretation. Someone with a history of paying in certain amounts every year wouldnt make a blip on the radar of HMRC. However, someone crystallising their pension and the making large contributions back into the pension stands out like a sore thumb. There could be good reason. if you could show the money came out of other sources then that would be acceptable. If you couldnt show that then it is clear what the intent was and that would be a breach.

wotsthat

dunstonh wrote: »

The recycling rules are HMRC

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm04104900.htm

Like may HMRC rules they are open to interpretation. Someone with a history of paying in certain amounts every year wouldnt make a blip on the radar of HMRC. However, someone crystallising their pension and the making large contributions back into the pension stands out like a sore thumb. There could be good reason. if you could show the money came out of other sources then that would be acceptable. If you couldnt show that then it is clear what the intent was and that would be a breach.

The rules seem quite sensible. They are to give the saver certainty about the parameters under which they can operate and not be unduly worried by interference from HMRC based on an arbitrary opinion of what intent is.

IMO the parameters are quite generous and I'd be surprised if an awful lot of people weren't quietly recycling lump sums within the rules.

Prothet_of_Doom

Interesting.
If you had children of universtity age, and you were say 46 to 54, it would make sense to pay enough into your pension, to bring your family income below £25K
(assuming you can live on that, but lots of people live on less, so if you live on more it might be a sobering experience)
This would mean greater university grants for the kids, maybe a low pay busary, if they picked the right university. And then when they have finished and you reach age 54, draw back the exact same amount as they recieved in extra grants and busaries.
I love these sort of loop holes.

dunstonh

If you had children of universtity age, and you were say 46 to 54, it would make sense to pay enough into your pension, to bring your family income below £25K

Yes. The same applies to working/childrens tax credits as well. I believe the maximum effective relief would work out to around 73% of the contribution. If you ignore growth and take your 25% back on retirement, that means it has only cost you 2%.

soperman

marlot wrote: »

I'm just coming up to 50, and have a mixture of deferred pensions. I also have a personal pension. I pay 40% tax.

I was thinking about the 25% tax free lump sum which I can get from my personal pension. What's to stop me funding my personal pension between now and age 54 to the maximum allowed, with the aim of taking the maximum tax free lump sum at 55, and then using the personal pension in income drawdown mode?

Obviously the chancellor could remove the tax free lump sum at any time, but is there anything else I have missed? Is this generally a good idea, or am I barking mad?

Best laid plans? There is no doubt that SIPP/Drawdown plans bring a flexible dimension to retirement planning but caution is the watchword. State intervention should not be under-played and you will read on this forum that salary and bonus sacrifice is a growing feature (the new Auto Enrolment rules have a significant part to play here). I wonder once the treasury capture the data on how much NI it is losing combined with the tax it is losing through reliefs whether some future change to the lump sum rules will be introduced as a balance.

I think it unlikely for such a change to be made in the near term and my guess is that the highly paid will remain targeted for some time with greater restrictions on pension inputs or a further reduction in th Lifetime Allowance.

So, in essence you have a good plan provided you understand both the investment and political risks and the fact that if your circumstances do change your savings are less liquid within a pension plan.