Pension contributions and avoiding recycling

jamesd

From all of that it seems to me that she should have no issue and also is unlikely to have one if she puts money into a personal pension then takes it out again soon afterwards. I doubt that she could pay enough into a personal pension this year to be caught by the recycling rule if she doesn't take the work pension at the same time as the personal pension lump sum.

Of course you may also be able to pay into personal pensions then take the money out later to improve your own situation. As with her, there's a potential for useful gains to be made.

Deneb

Thanks again James, that does make everything much clearer.

I already pay sufficient into a personal pension to mitigate my 40% tax liability. Whilst I could pay more, there's not much in it between that and ISAs as I will be a BR taxpayer in retirement, and until recently ISAs had more flexibility.

Mrs D will be a non-taxpayer until SPA, so there's a greater advantage to maximising pension contributions on her behalf at present.

As I'm also aiming for early retirement within the next 2-3 years, much of our additional pension and investment strategy is already intended to supplement our income up to SPA.

The contribution figures I've quoted are just hers. Unlike mine, the employer contributions aren't stated on her payslips, but using her total pensionable pay figures and the employer contribution percentage the overall figures would be:

2011-12 £13,275.30
2012-13 £15,504.27
2013-14 £16,203.25
2014-15 £14,220.60 (projected, without further additional contributions)

atush

have you thought of saving extra money into a DC pension for her from now until retirement? with the tax relief it might buy you a year of waiting to claim her DB pension (ie take it at 56 not 55 so less reduction)?

Deneb

Atush, that's why I asked the original question. She has money set aside that was originally intended to buy more NHS additional pension. We want to put that into a DC pension for her, but I was concerned on the effect of the recycling rules if she does that and receives her PCLS in the current tax year.

She is going to an in-house pre-retirement seminar next month, so I intend to write a list of the questions we have beforehand. Trouble is, from my own experience of these seminars in my own organisation, the people taking them probably know less than the people on MSE.

Anyway, we are looking in to the possibility of deferring her pension for the full 5 years. If not, I think we can certainly manage 3. The big question is whether the scheme allows that, but the documentation seems to say so:

"If you leave the Scheme with deferred benefits on or after 31 March 2000 and are aged 50 or over, you may be able to claim your deferred main Scheme and any NHS AVC benefits early, provided you are no longer in NHS employment."

If that is as it says, it would mean she could try to hold out for 5 years, but with the option to start her pension sooner if necessary. Also, not necessarily applicable for my OH, but maybe of interest to anyone else reading this in future, "No longer in NHS employment" apparently allows part-time NHS employment up to 16 hours per week without affecting the deferred benefits.

atush

It wont be recycling if she has enough spare income to fund the contributions. I guess it depends on how much income sha has over the current contributions to her scheme.

Deneb

I know, but it seems that could be something that would be very easy for HMRC to allege, and difficult to disprove without documented advice to support the contributions. To be completely safe, everything I have read including insurance companies advisor sites suggest that it is best to avoid at least one of the other trigger points.

The RPSM includes examples where contributions are funded from savings prior to the PCLS being taken, when the PCLS is used to replace them.

I know there has to be an intent, and the rules are not designed to trap the unwary, penalise normal retirement planning exercises etc. Just seems to me that it's best to avoid any suggestion from the outset!

SomeUser

There's a difference between saving as much as you can before retirement and recycling. As long as you don't take your tax free cash and stick it straight back into a pension scheme, you're generally ok (you can put a little bit in though...).

I know of many people who have contributed the maximum annual allowance in the years before retirement. You can contribute as much as you want, subject to 100% of earnings and the AA or £3600.

If she decides to defer for as long as possible, the pension recycling becomes a moot point because she can't take tax free cash from DB and leave the rest of her benefits uncrystallised, even with the new rules (unless she does it within the current timescales, as in 6months before retirement).

If she does take her PCLS, as long as she doesn't put more than 30% of PCLS or £12.5k into a pension, HMRC won't be interested in her.