Pension LS recycling calculation

Orwell

This one is doing my head in.

I am 55 and intend to keep contributing to my DC pension until I retire (ideally at 60).

However I would like to take a tax free LS of part of my DC plan this year, so with that in mind I have transferred some of my DC plan funds into a SIPP so it can be made into capped drawdown (zero income) if I choose to crystalise it and take a LS.

So far so good. I will still be able to keep contributing up to £40k pa into the DC plan as usual due to the zero income on the drawdown.

However I don't want to fall foul of the recycling rules even though I am not attempting to recycle anything (I would buy a car with the LS).

One of the recycling rules, that must be true to trigger a recycling issue, is if because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be.

The HMRC rules state "As a rule of thumb, HMRC accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

The amount of additional contributions is measured on a cumulative basis to determine whether or not a significant increase has occurred. See RPSM04104950 for more information about the cumulative basis"

So let me try to work out my headroom, as I do want to increase contributions to some extent anyway for tax reasons (while the 40% relief lasts!).

The cumulative period measurement is two years before and two years after the LS is taken (as well as the LS year). So let's assume my figures are thus

Year-2 contribution to DC plan was £25000
Year-1 contribution to DC plan was £28000
This year contribution to DC plan is £35000
Year+1 contribution to DC plan will be £35000 (est)
Year+2 contribution to DC plan will be £30000 (est)

Using the first figure (£25k) as the datum, I reckon that the cumulative increase is therefore £3k+£10k+£10k+£5k, i.e. £30k in total over the datum figure x 5 which would be £125k - since £30k is less than 30% of £125k, it means the increase is not considered significant.

Please can someone confirm my thinking, if I am correct then I can ignore the rest of the recycling rules, since the increase in funding is not more than 30% than expected (and also the amount of the LS is therefore irrevelant in this respect).

Orwell

Anyone able to provide an example of calculating a "signficant increase" under the recycling rules?

DaveMcG

The basis of the recycling rule is that you take a pension commencement lump sum with the intention of reinvesting it.

Obviously there is no way of proving what is in someones mind at a certain point in the past, so it is quite a silly law and was only passed to stop insurance companies and advisers setting up schemes that rapidly and automatically recycled (there were planning to do so).

So in short if you have no plans to recycle and are paying your contributions from income there should be no issues with recycling particularly when your intention at the time of taking the lump sum is to purchase a car.

Orwell

OK thanks, my aims are two fold

1. Maximise 40% tax relief while it lasts (probably it will be removed soon) so this tax year and next I want to increase my DC contributions paid from my income.

2. Take some LS now - for a car, but also because of the Labour threat to cap the amount of LS allowed in the future.

Because I will probably need to claim for the extra HRT relieft it may well bring HMRC attention to the LS, so I don't want to accidentally fall foul of the rules. I quite understand your point about systemic recycling being the aim of these complex rules.

The threat to future LS is perhaps unnecessairly paranoid, but the threat to 40% tax relief is very real.

jamesd

HMRC provides examples of the cumulative calculation a few pages after the one you linked to: applying, not applying.

In capped drawdown you can take out the GAD limit amount without triggering the reduction in annual contribution limit. It's one reason to go into capped drawdown this tax year while it's still available. There's no special restriction on recycling this income and that would perhaps explain an increase in contribution as being other than from the lump sum.

kidmugsy

Orwell wrote: »

.

The threat to future LS is perhaps unnecessairly paranoid, but the threat to 40% tax relief is very real.

Yup, a coalition government of Labour, Liberal Democrats and Greens would not be a lovely thing.

ffacoffipawb

kidmugsy wrote: »

Yup, a coalition government of Labour, Liberal Democrats and Greens would not be a lovely thing.

Salary sacrifice gets round that. And if they tax employer contributions that will open up a whole new can of worms.

Gatser

jamesd wrote: »

In capped drawdown you can take out the GAD limit amount without triggering the reduction in annual contribution limit. It's one reason to go into capped drawdown this tax year while it's still available.

Reassuring....but.... Yesterday I had a conversation with a large pensions company with a view to doing just that (Commencing my Capped DD and taking the LS) but they told me that HMRC have still not finalised and confirmed that the £40k contribution limit will be protected for pre-April '15 capped DD pensions!
"We are expecting to get HMRC confirmation and contact all policyholders in February"

I cannot believe such a big company could get this wrong?

Then again.... I am thinking.... If I start Capped DD & take LS anyway.... why will it matter?!! Certainly if I leave beyond March my contributions will be limited to £10k because Capped DD is no more from April.

Appreciate your views...thanks....

Orwell

That's a bit worrying. However if you take capped DD with zero income that seems to be OK (in terms of the £40k limit) and then you could decide if it's safe to take an income up to the cap later?

Or did you mean take capped DD with zero income would also be impacted by removal of £40k limit?

jamesd

Last I knew the law hadn't yet been passed so it is not surprising that HMRC haven't finalised things. The policy statement that capped drawdown will be protected was clear, though. At a minimum you'll be able to take the GAD limit amount this tax year without triggering the reduction even if that does end up getting removed.

No surprise that a large pension company wants certainty before saying something. They wouldn't want upset customers if things don't turn out as originally announced.

Gatser

Orwell wrote: »

That's a bit worrying. However if you take capped DD with zero income that seems to be OK (in terms of the £40k limit) and then you could decide if it's safe to take an income up to the cap later?
Or did you mean take capped DD with zero income would also be impacted by removal of £40k limit?

There was just general non commitment regarding the level of protection on the £40k contribution limit beyond April 2015.
I want to move my funds into capped drawdown, take the TFS and only start taking the 150%GAD in 2015-16 tax year. The pension company could not confirm that my future SIPP contributions could continue above £10k (until HMRC have themselves formally confirmed)

I fully accept the Pension Company position, its just very frustrating at the speed of HMRC on this, as I wish to avoid a mad scramble of form filling in March. :eek: