Pension Recycling

OldBeanz

Having read another thread which gave links to recycling of pensions I was wondering if any expert out there had an opinion on my position.
I have a Civil Service pension along with AVC's and a SIPP. A couple of years ago I realised that I was within striking distance of attaining a £20k pa CS pension so have started channelling funds in that direction.
I am 59 next month, earn £35k, and plan to retire when I am 62.5 in September 2017.
Last FY I paid an extra £1k into my CS pension and this year it will be an extra £24k. This leaves me in the position that come 60 any redundancy would be enough to take me to the £20k mark (6 months redundancy into pension then start drawing). In 2001(?) I moved to Classic plus from the Classic scheme so I would get a lump sum of £30k from my original scheme.
In addition until this year I have paid £200pcm into the AVC and £15pcm into a stakeholder which I have recently converted into a SIPP. I will merge them at 60 and they have a total value of £50k +£20k =£70k.
My intention was to pay £18k before tax into the SIPP next FY giving a value of £90k+ before drawing the 25% lump sum and pension in 2020 when with a good wind it will be worth a bit more. I may make £3.2k pa further payments into the SIPP over the years if feeling flush. At no time will I bother the higher tax bracket.
I am concerned that next year's payment to my SIPP will attract the attention of HMRC as it will be within 3 years of my CS £30k lump sum.

kidmugsy

From a useful summary from Hargreaves Lansdown:

"WHO MIGHT BE AFFECTED?
The tax charge could be incurred if all of the following happen:
• an individual takes tax-free cash from a pension,
• as a result of having taken tax-free cash the
contributions paid into a pension are significantly greater than they would otherwise have been (see ‘What counts as a significant increase?’),
• the recycling was pre-planned (HMRC will consider each case and any evidence that points to pre-planning),
• the amount of the tax-free cash,together with tax-free cash taken in the previous 12 months, exceeds 1% of the standard lifetime allowance (1% is currently £15,000, dropping to £12,500 in 2014/15), and
• the cumulative amount of the additional contributions exceeds 30% of the tax-free cash
The recycling rules are not intended to catch genuine retirement planning, however it may be possible to be inadvertently caught and incur a tax charge of up to 70% of the tax-free cash.
WHAT COUNTS AS A SIGNIFICANT INCREASE?
To decide whether contributions have been significantly increased HMRC will look at the contributions that might have been expected if the tax- free cash had not been received and compare this to actual contributions.
HMRC will generally consider an increase of 30% or more on expected contributions to be significant. To prevent people from making gradual increases, the contributions are measured over five tax years; the tax year the tax-free cash is taken and the two tax years either side.
If the cumulative increase over these years exceeds 30% this would be classed as significantly greater. To calculate the increase each of these five tax years is measured individually against the expected contribution for that year and the percentage figures obtained added together.
...
SOME EXAMPLES ……."

It might be worth your downloading and studying. One thought occurs to me: your plan can hardly be held to be planning to make contributions within two years of retirement if the retirement came as a result of an unplanned (by you) redundancy offer. Your planned retirement date is in 2017-18, so the quarantined years are 2016-17 and 2015-16. Or are you saying that you'll get a lump sum at age 60 come what may?

kidmugsy

Is this thread helpful?
https://forums.moneysavingexpert.com/discussion/3364576

OldBeanz

Kidmugsy I will not receive any pension until I retire at 62 though I can draw from 60. Things are a bit clearer, as if am not made redundant then I will be outside the 2 years either side at 62.5. If I am offered voluntary redundancy how can I then convince HMRC that I intended to retire at 62.5 for the payments made into the SIPP which will then fall within the 2 year catchment period?

OldBeanz

Thinking further, there are no set retirement dates now just an age when you can draw your pension. I think I may have answered my own question:).

atush

OldBeanz wrote: »

Kidmugsy I will not receive any pension until I retire at 62 though I can draw from 60. Things are a bit clearer, as if am not made redundant then I will be outside the 2 years either side at 62.5. If I am offered voluntary redundancy how can I then convince HMRC that I intended to retire at 62.5 for the payments made into the SIPP which will then fall within the 2 year catchment period?

One way you can show HMRC you intended to retire at 62.5 is to print off this thread. although it also shows planning lol.




Maybe post on another retirement forum about retiring at 62.5. but don't show your planning on that one?

OldBeanz

Heaven help that I start planning my pension.
Like most (some I suppose having been on here a while) people, I knew I had a pension in my 20's and 30's and knew it would make sense to pay a bit extra in my forties. It is only now in my late fifties that I have any extra cash. Planning to reach £20k per annum is compromised by starting my pension a year after the government is due to review the figure in 2016 and the following review in 2021 will come as I draw my state pension.
It is more crossing my fingers and hoping for the best:).

jamesd

The lump sum recycling rule cumulative test applies to the tax year in which the lump sum is taken and the two tax years before and after it. September 2017 is the 2017/18 tax year. The tax year two years before it is 2015/16. The current tax year is 2013/14, outside that window. Next tax year is 2014/15, also outside that window. So your £18k contribution will not be within the period considered for your CS pension.

You're more than 55 years old. There are no restrictions at all on recycling pension income. So one thing to consider is starting income drawdown from the £90,000, taking a 25% lump sum. The GAD limit would then allow you to take something like £4,000 a year of income and recycle that into pension contributions.

If you do that, then the taking of this lump sum and your £18k contribution will be close. But you can protect against that using the rule that "the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12 month period, exceeds 1% of the standard lifetime allowance". If that threshold is not exceeded, the recycling rule does not apply.

The lifetime allowance is £1.5 million this tax year so the 1% value is currently £15,000. Up to that is not subject to the recycling rule. 25% of £90k is £22,500, so this rule wouldn't protect you from that much. But four times £15,000 is £60,000 so you could take the lump sum from that much and be protected. Why not do it this tax year when it's also well outside the CS test period? Then you can do the rest later, more than 12 months after the first part. The £45k from the first £60,000 could produce an income of about £2,700 a year that you can recycle into pension contributions.

Meanwhile you can recycle all of the pension income from maximum drawdown to help to establish a higher record of pension contributions each year, which will help to pass any significant increase test.

I suggest that you get started this tax year if you can, since you appear to have sufficient time to get everything done and also benefit from the recycling of pension income to produce a new lump sum, a second bite at the tax relief cherry. It will be useful to start this tax year to allow time to get everything done comfortably. Why not use 0% credit cards if you happen not to have the cash available? MBNA do some that allow money transfers into a current account. Or maybe use a 0% for purchases card for as much spending as possible and using the no longer immediately spent money to fund it. Or draw on savings.

You appear to have these opportunities:

2013/14 take £15,000 lump sum, protected by 1% test on lifetime allowance of £1.5 million.
2014/15 take £12,500 lump sum, protected by 1% test, lower lifetime allowance of £1.25 million. If you have this much to take.
2015/16 take no lump sums, just continue to recycle pension income. 2 years before CS
2016/17 take no lump sums, just continue to recycle pension income. 1 year before CS.
2017/18 take CS lump sum and any other lump sums you want to take.
2018/19 do no higher pension contributions, just the ongoing income, if desired, but if not working you'd be limited to £3.6k gross, a substantial reduction, not increase.
2019/20 as 2018/19
2020/21 outside test window from CS, free to act.

So get started this year if you can, using borrowing if necessary, just to maximise what you can do within the 1% limit, avoid the potential for trouble and benefit from recycling the pension income.

OldBeanz

I am maxed out contribution wise for this FY and was aware that I could be recycling my pension. I think it may all get quite messy if I started this. Time to think.