Lump Sum Pension Investment and Recycling

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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tigerspilltigerspill Forumite
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I have been reading some of my company pension documentation relating to AVCs. My scheme allows salary sacrifice and lump sum investments.
Given that this tax year is nearly done and that I have contribution allowances carried over from the previous few years, I was considering a lump sum to catchup. Maybe £30K+ish.

However, the documentation has a phrase that basically that the HMRC might might not like this if they feel I am trying to "recycle".
Now I have read the HMRC pages and examples on recycling and I totally get doing it after receiving a pension payment. But I am not sure I understand how recycling can be done paying in advance.

I have no intention of trying anything dodgy here - I just want to make a lump sum pension investment totally above board.

I believe I would declare this payment on my SA tax return and they would send me the tax refund (I am paying 40%).
I am paying £30K at 40%; am turning 49 next month and would hope to withdraw this when I am somewhere between 55 and 60 depending on what happens.

I am also considering a SIPP rather than AVCs due to much more flexibility in funds availability. Bit I don't think this affects my question on recycling.

Basically, what would lead HMRC to be concerned that I am recycling? I assume that this would be triggered from my SA tax return, but I am wondering what triggers this?
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  • edited 29 December 2014 at 8:58PM
    Parking_TroubleParking_Trouble Forumite
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    edited 29 December 2014 at 8:58PM
    I wasn't aware of this recycling so looked at HMRC guidelines.

    Can't see a problem for you but surely depends on the source of the lump sum. If it comes from another PCLS I guess it is not allowed. If it's a windfall then it's OK.

    You have to meet all six points mentioned here for it to be unauthorised payments

    http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104920.htm

    Examples of "not allowed" recycling
    http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm04104980.htm

    Examples of "Allowed recycling"
    http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104990.htm

    Not sure where my plan to go interest only on mortgage and pay AVC's fits into this.
    Mr Straw described whiplash as "not so much an injury, more a profitable invention of the human imagination—undiagnosable except by third-rate doctors in the pay of the claims management companies or personal injury lawyers"

  • tigerspill wrote: »
    I have been reading some of my company pension documentation relating to AVCs. My scheme allows salary sacrifice and lump sum investments.
    Given that this tax year is nearly done and that I have contribution allowances carried over from the previous few years, I was considering a lump sum to catchup. Maybe £30K+ish.

    However, the documentation has a phrase that basically that the HMRC might might not like this if they feel I am trying to "recycle".
    Now I have read the HMRC pages and examples on recycling and I totally get doing it after receiving a pension payment. But I am not sure I understand how recycling can be done paying in advance.

    I have no intention of trying anything dodgy here - I just want to make a lump sum pension investment totally above board.

    I believe I would declare this payment on my SA tax return and they would send me the tax refund (I am paying 40%).
    I am paying £30K at 40%; am turning 49 next month and would hope to withdraw this when I am somewhere between 55 and 60 depending on what happens.

    I am also considering a SIPP rather than AVCs due to much more flexibility in funds availability. Bit I don't think this affects my question on recycling.

    Basically, what would lead HMRC to be concerned that I am recycling? I assume that this would be triggered from my SA tax return, but I am wondering what triggers this?
    I'm not an expert but it doesn't sound like recycling as you can't take the lump sum within the next 12 months due to being 49 (and even then example 2 in the 2nd link seems to suggest taking the lump sum from one scheme to contribute to another scheme).

    (In advance seems to mean in January you pay in £20k and then you take the lump sum in May and the lump sum 'reimburses' you for the contribution you made in January).

    BTW just to be sure you need to have paid enough tax to get the full relief on the contribution - having unused annual allowance on its own is not enough (but seems you have this based on "I am paying £30K at 40%").

    Can you use salary sacrifice to make the contribution instead? - you would then get the NI saving too and maybe the Employer NI saving as well. Then use the money you would have paid as the lump sum to replace the lost salary.

    Is this an occupational pension scheme? If so the administrator may be able to provide more guidance on recycling.
  • edited 29 December 2014 at 10:07PM
    jamesdjamesd Forumite
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    edited 29 December 2014 at 10:07PM
    tigerspill wrote: »
    I am ... turning 49 next month
    You can ignore the lump sum recycling rules and pay in what you like. It's completely impossible for a person who is 49 years old to be affected by them if you have the normal age 55 to get pension benefits. The earliest tax year when you may have to consider them is the tax year two years before the tax year in which you take out a lump sum. Which means at the earliest the tax year two years before your 55th birthday.

    If you want to protect against the recycling rule you could arrange to have high pension contributions in the third year before you reach 55, so that later years will show a decrease in contributions, not an increase.

    For your normal pension contributions you don't have to wait for doing a tax return, you can tell HMRC an estimated annual amount and they will adjust your tax code, increasing your basic rate band by the amount of your pension contribution. Your lump sum is probably too big to do that in what's left of this tax year.

    If you did something like take out a new mortgage or increase the amount on a mortgage to pay money into a pension then repaid the extra borrowing with the lump sum, all within the period covered by the five year rule you, could be affected by the recycling limit and subject to the penalty. If you were to want to do this, doing the borrowing earlier than that would be one way to avoid infringing the letter of the rule.
    Not sure where my plan to go interest only on mortgage and pay AVC's fits into this.
    It shows you're sensible. It's otherwise unrelated to the lump sum recycling rule because you're not recycling a lump sum or borrowing to pay money into a pension within the two tax years before the one in which you take out the lump sum. Ignoring market moves I expect that this time next year I'll have enough in my pension pot to clear my mortgage, all from tax relief of various sorts.
  • jamesdjamesd Forumite
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    BTW just to be sure you need to have paid enough tax to get the full relief on the contribution - having unused annual allowance on its own is not enough.
    For personal contributions including at work, not via salary sacrifice, you get tax relief on your whole earned income, regardless of whether you paid tax on any of that income. A person earning £30,000 could pay £30,000 into a pension and get relief on it all. As could a person earning £60,000 paying £60,000 into a pension using carry-forward. It doesn't matter that about ten thousand Pounds in each case could be the personal allowance on which no tax was paid.

    A person earning £60,000 and having £10,000 of second job or investment income could say salary sacrifice £30,000 (or more) and get higher rate income tax relief on £30,000, higher rate NI saving on £20,000 and basic rate NI saving on £10,000. Higher/basic rate NI is an approximation that happens by policy to be correct at the moment. Also for convenience I used £40,000 as the higher rate threshold even though it's really above that - I wanted to make the numbers obvious.

    I excluded the salary sacrifice case partly because you're not allowed to sacrifice below minimum wage, so it's mostly moot for normal employees, who can't get work income into their personal allowance range this way because minimum wage is higher.

    VCTs have the rule that the relief is limited to the tax actually paid in the year but pensions don't.
  • tigerspilltigerspill Forumite
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    And this is why I started posting on here - the amazing help!
    I haven't had a chance to go through all the detail (I will later this evening or tomorrow), but wanted to say thanks again to all who have responded.
  • jamesd wrote: »
    For personal contributions including at work, not via salary sacrifice, you get tax relief on your whole earned income, regardless of whether you paid tax on any of that income. A person earning £30,000 could pay £30,000 into a pension and get relief on it all. As could a person earning £60,000 paying £60,000 into a pension using carry-forward. It doesn't matter that about ten thousand Pounds in each case could be the personal allowance on which no tax was paid.

    A person earning £60,000 and having £10,000 of second job or investment income could say salary sacrifice £30,000 (or more) and get higher rate income tax relief on £30,000, higher rate NI saving on £20,000 and basic rate NI saving on £10,000. Higher/basic rate NI is an approximation that happens by policy to be correct at the moment. Also for convenience I used £40,000 as the higher rate threshold even though it's really above that - I wanted to make the numbers obvious.

    I excluded the salary sacrifice case partly because you're not allowed to sacrifice below minimum wage, so it's mostly moot for normal employees, who can't get work income into their personal allowance range this way because minimum wage is higher.

    VCTs have the rule that the relief is limited to the tax actually paid in the year but pensions don't.
    Thanks for that James I wasn't aware of this and thought you needed to actually pay the tax.

    A few queries:

    1) Does it specifically say that you don't need to pay the tax somewhere on the HMRC website? - I've tried looking but can't find anything (at the same time it doesn't specifically say that you have to have paid the tax either!)

    2) When you say £30k above - do you mean that £30k is the gross contribution i.e. you would pay in £24k and get £6k tax relief?

    On that basis looking at: http://www.thesalarycalculator.co.uk/salary.php

    Someone earning £23500 would pay:
    Tax £2,700.00
    National Insurance £1,865.28
    Total: £4565.28 in tax and NI

    But could then make a contribution of 0.8*23500 = £18800
    The provider would reclaim an amount of £4700 from HMRC

    So the person would be better off by £4700 - £4565.28 = £134.72

    Is this right? Not the best example but an interesting result!
  • tigerspilltigerspill Forumite
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    jamesd wrote: »
    For personal contributions including at work, not via salary sacrifice, you get tax relief on your whole earned income, regardless of whether you paid tax on any of that income. A person earning £30,000 could pay £30,000 into a pension and get relief on it all. As could a person earning £60,000 paying £60,000 into a pension using carry-forward. It doesn't matter that about ten thousand Pounds in each case could be the personal allowance on which no tax was paid.

    A person earning £60,000 and having £10,000 of second job or investment income could say salary sacrifice £30,000 (or more) and get higher rate income tax relief on £30,000, higher rate NI saving on £20,000 and basic rate NI saving on £10,000. Higher/basic rate NI is an approximation that happens by policy to be correct at the moment. Also for convenience I used £40,000 as the higher rate threshold even though it's really above that - I wanted to make the numbers obvious.

    I excluded the salary sacrifice case partly because you're not allowed to sacrifice below minimum wage, so it's mostly moot for normal employees, who can't get work income into their personal allowance range this way because minimum wage is higher.

    VCTs have the rule that the relief is limited to the tax actually paid in the year but pensions don't.


    Thanks for this. So I am not trying to understand the actual mechanics of this and how and where i would get the tax back.

    So lets say in my case as I suggested where I am paying 40% HR Tax on £30K
    If I then put this 30K into a SIPP, does the SIP provider make this up to £37,500 automatically (adding BR tax on).
    Then do I claim the other 20% back on my tax return or tax code if I tell HMRC early enough?
  • jem16jem16 Forumite
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    2) When you say £30k above - do you mean that £30k is the gross contribution i.e. you would pay in £24k and get £6k tax relief?

    yes that would be gross.
    On that basis looking at: http://www.thesalarycalculator.co.uk/salary.php

    Someone earning £23500 would pay:
    Tax £2,700.00
    National Insurance £1,865.28
    Total: £4565.28 in tax and NI

    But could then make a contribution of 0.8*23500 = £18800
    The provider would reclaim an amount of £4700 from HMRC

    So the person would be better off by £4700 - £4565.28 = £134.72

    Is this right? Not the best example but an interesting result!

    Yes.
  • jem16jem16 Forumite
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    tigerspill wrote: »
    So lets say in my case as I suggested where I am paying 40% HR Tax on £30K
    If I then put this 30K into a SIPP, does the SIP provider make this up to £37,500 automatically (adding BR tax on).

    No. You would pay in £24,000. The pension provider makes it up to £30,000.

    You then claim back another £6,000 from HMRC meaning that your £30k gross contribution has cost you £18,000. This can be done either through a tax return or by phoning HMRC who will adjust your tax code.
  • jamesdjamesd Forumite
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    1) Does it specifically say that you don't need to pay the tax somewhere on the HMRC website? - I've tried looking but can't find anything (at the same time it doesn't specifically say that you have to have paid the tax either!)
    The Tax on your private pension contributions page may come close enough for you since section 2 both says that you can pay in up to 100% of your earnings and that you get the tax relief automatically.

    Jem16 handled the other questions.
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