Help! : Tripping up on The Recycling Rule

david78

I have been trying to work out whether I could inadvertantly be caught by this rule. After some years of annual contributions between £4000 and £9000 into my SIPP, I significantly increased by contribution to £16000 in 2014/15 (the current year). My reason for doing this is to maximise HRT tax relief while it is available and to take advantage of the new flexibile drawdown coming in on April 6 (I am over 55).

My plan is to continue with payments around £16000 for the next 3 tax years (2015/16, 2016/17, and 2017/18) when I would retire and begin to draw an income from my SIPP (income will be taken from 2018/19).

Ideally, I would like to crystalise the fund and take the TFLS at the end of 2015/16 (next year) while the annual allowance is £1.25M. I would not take any income at this point. However, I am not sure this is possible without triggering this rule. The TFLS would exceed 1% of the annual allowance (£12500).

Contributions would be

2013/14 £9000
2014/15 £16000
2015/16 £16000 << year where TFLS is taken
2016/17 £16000
2017/18 £16000 (last payment)

The cumulative increase over these 5 years is just £7000. How is the "normal" contribution level determined as the basis for determining the percentage increase?

An alternative would be to Crystalise at the start of 2016/17 when the LTA may be smaller (under the proposed changes). The TFLS would exceed 1% of the annual allowance (>£10000).

In this case the contributions are:

2014/15 £16000
2015/16 £16000
2016/17 £16000 << year where TFLS is taken
2017/18 £16000 (last payment)
2018/19 £0

I am not even sure what the cumulative amount is here (-£16000 ?).
Could I assume this would be OK and the 2013/14 £9000 contribution would drop out of considerations.

I have looked at the HMRC example calculations, but none of these show how cumulative increase of 5 years is actually tested. Most talk about the "normal contribution over 10 years" but don't say how this is determined.

Any help would be much appreciated.

kidmugsy

Have you got headroom enough to split your pot in two NOW (in '14-'15), draw a lump sum from one part that's below £12,500, and put the other 75% into capped drawdown? There's no need to actually withdraw any taxable income, but being in CD gives you more flexibility in future - see comments over recent months by jamesd.


Then crystallise the other portion of the pot a couple of years after your last £16k contribution.

Would that do the trick?

david78

Hi kidmugsy. Thanks for replying.

I am interested in knowing more about capped drawdown but I don't really understand it at the moment (other than it is only available until 5 April 2015).

I don't know what you mean by "Headroom".

Are you saying move £50,000 of my pot into capped drawdown, take 12,500 TFLS leaving 37,500 of crystalised funds in a capped drawdown account? (I assume the capped drawdown account is a separate SIPP account to my SIPP).

This would extract £12,500 TFLS without triggering the recycling rule, but I cannot see why this is any different from just using flexible drawdown in 2015/2016.

I would appreciate any pointers on what the flexibilities offered by capped drawdown in the future might be. I assume if they are taking this facility away it must be to the taxpayers advantage somehow . In my case I won't really be able to recycle any income into my account as I am going to be very close to using 100% of my LTA due to two DB pensions in addition to my SIPP.

Also I don't fully understand the requirements that must be met to be able to move into capped drawdown. Websites talk about needing to have some "secure" pension income but I don't have any yet (I am still working).

One of my motivations to take some TFLS in the next year is from my, possible irrational, fear that it will be disappearing (along with HRT) at some point. £12,500 would be a step towards this.

kidmugsy

david78 wrote: »

Are you saying move £50,000 of my pot into capped drawdown, take 12,500 TFLS leaving 37,500 of crystalised funds in a capped drawdown account? (I assume the capped drawdown account is a separate SIPP account to my SIPP).

This would extract £12,500 TFLS without triggering the recycling rule, but I cannot see why this is any different from just using flexible drawdown in 2015/2016.

Because once you put yourself into flexidrawdown, you are allowed a max pension contribution of only £10k p.a., whereas the CD trick preserves your right to contribute up to £40k p.a.

david78 wrote: »

In my case I won't really be able to recycle any income into my account as I am going to be very close to using 100% of my LTA due to two DB pensions in addition to my SIPP.

But you've shown continuing annual contributions of £16k on your schedule.

david78 wrote: »

Also I don't fully understand the requirements that must be met to be able to move into capped drawdown. Websites talk about needing to have some "secure" pension income but I don't have any yet (I am still working).

Ignore that: it's a reference to the old style of flexible drawdown that ends on 05/04/2015.

david78 wrote: »

One of my motivations to take some TFLS in the next year is from my, possible irrational, fear that it will be disappearing (along with HRT) at some point. £12,500 would be a step towards this.

Nothing irrational about it: a limit of £30k TFLS has already been talked about.


Mind you, the LTA might vanish as a limitation on you if there's a good market crash before you retire. Nothing is written in stone.

Is there any mileage in drawing your DB pensions early? Would the actuarial reduction help you in any way?

kidmugsy

david78 wrote: »

£12,500 would be a step towards this.

Or rather £12499 would be; here's Hargreaves Lansdown's summary:-

"WHEN COULD YOU BE AFFECTED?
The tax charge could be incurred if ALL of the following happen:
• you take tax-free cash from a pension,
• as a result of taking 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?’ below),
• the recycling was pre-planned (HMRC will consider each case and any evidence which points to pre- planning),
• the amount of tax-free cash you take, together with any tax-free cash taken in the previous 12 months, exceeds £12,500 (unless fixed protection or individual protection 2014 is held), falling to £7,500 from the 2015/16 tax year,
• the cumulative amount of the additional contributions exceeds 30% of the tax-free cash (see example 2).
The recycling rules are not intended to catch genuine retirement planning, however, you could be inadvertently caught and incur a tax charge of up to 70% of the value of your tax-free cash."

So they believe that if you withdraw a TFLS beneath £12500 in THIS tax year, you will necessarily be free of recycling worries that might otherwise exist. It would also mean that as long as you entered CD you could contribute your hoped-for £16k p.a., and that you'd have reduced your LTA on the basis of £1.25M rather than £1M, and that you'd have reduced the effect that any growth in the £37,497 would have on the LTA calculation. Sounds good to me.

david78

The continuing annual contributions of £16000 on my schedule will come out of my earned income (Still working to end of March 2018 when I would retire early. NRD is in 2020).

I am not trying to recycle any of the TFLS, just to extract as much as I can as early as I can. Any benefit of being able to claim the BCE as coming from the £1.25M allowance would be a bonus but isn't essential.

As I have also said I don't need to recycle any of my pension income at all. If I do this I would have to leave the current active DB scheme I think . So for me it doesn't look like CD is much use.

My total TFLS will not be very large as much of my Pension is in the DB schemes and it isn't advantageous to take TFLS from them. However, I do want to extract as much TFLS from my SIPP as I can to be tax efficient.

As my two DB pensions don't pay out until much later 2020 and 2025 I would be able to trade-off pension and cash in these to mitigate any chance of going over 100% LTA so this would be my Plan B.

jamesd

david78 wrote: »

I have been trying to work out whether I could inadvertantly be caught by this rule.

Please tell me/us the approximate pension pot size now. It'll help to plan how because the optimal way depends on amounts.

What I suggest that you do is:

1. Immediately enter capped drawdown with £50,000 and take £12500 as the maximum tax free lump sum.
2. On the anniversary plus one day of doing that, take benefits from £30,000, using £7,500 of lump sum, the replacement for the 1% of lifetime allowance.
3. Repeat each year at 12 months plus one day.

Time is of the essence here, the one day is safety margin for the rule about lump sum amount taken out within a rolling twelve month period. Stay at no more than 1% then 7500 and you can't trigger the recycling rule.

However, HMRC must surely be aware that the rule changes have made pensions more attractive and should expect them to cause an increase in pension contributions that is not attributable to the lump sum.

Another rule to use is that the rule isn't triggered unless the cumulative increase is more than 30% of the lump sum. If your pension pot size is £1 million you can take a lump sum of £250k and 30% of that is £75,000. So this is what I suggest you do if the amounts are large enough for the lifetime allowance to be a concern.

jamesd

So far as income goes, I suggest that you start to take the capped drawdown income. If you have a large pot you can go with VCT buying and hold for five years. If a small one so LTE isn't a concern, you can recycle the income without breaking the rules.

Recycling the income, which is not restricted, also can explain your increase in pension contributions. For the larger pot sizes the potential of around 6% of a million Pounds of pot generating extra income - £45,000 of it after lump sum - means no lump sum use is needed to hit the full annual cap.

kidmugsy

david78 wrote: »

The continuing annual contributions of £16000 on my schedule will come out of my earned income

I am not trying to recycle any of the TFLS

There's no use saying "Honest guv, this pound is income not lump sum." Money is fungible, which is why the rules are as they are.

Get a big mug of coffee and an ice pack, and read again what your commenters have said.

david78

SIPP is expected to be about £175,000.

Will get that coffee.

jamesd

Assuming the SIPP is now £175,000, 25% tax free lump sum is £43,750. Income at 6% GAD limit would be £7,875 and 30% of the lump sum £13,125.


The income increase explains part of pension contribution increases and beyond that you have to exceed the 30% cumulative increase above what the past history and income supports before it could be considered to be lump sum recycling. You also have your real reason which is not prohibited either, it's entirely legitimate to react to changes in law.