Is there a recyling issue here?

camcomuter

I took voluntary early retirement when the government agency I worked for closed down and got a compensation payment of 39,000 (first 30,000 tax free).

18 months later in August 2012 I was 60 and took the lump sum of 67,000 and an annual pension of 23,000. That is the normal pension age for the PCSP.

I did some work for myself for about a year but earned very little, then from april 2013 to Feb 2014 I had a full time job earning £41,000 pro rata. I am now in another 1 year contract earning £31,000.

During 2013/14 I have to pay 40% tax on quite a lot of my combined earned and pension income. I thought I could invest (about £18,000) in a private pension scheme to build up additional pension and reduce the amount I had to pay tax on at 40%. But I am told I might run into recycling issues because of my previous lump sum. Can anyone advise if this is correct? Surely the income from my job can cover this? I would need to do this this year to recover the tax (so not much time!).

Linton

Your compensation payments would seem to be nothing to do with your pension and so wouldnt give rise to recycling. It is common for people to explicitly put taxed redundancy payments straight into their pension.

The recycling that could cause problems is the tax free 25%. HMRC dont like you getting two sets of tax free payments from the same initial pot. However in your case as you can clearly demonstrate the pension is paid out of income that doesnt seem to be a problem.

Note that your pension income does not give you access to a tax rebate on pension payments. You can only claim that on earned income.