carry forward rules

jamesd

TH1878 wrote: »

Yes, technically they can look at the 2 years before drawing TFC but HMRC have said that normal retirement planning (which is what this is) wouldn't fall foul of the pension recycling rules as it wouldn't be pre-planned.

The difficulty is knowing in advance what HMRC would decide, which puts taxpayers in a position of uncertainty unless they stay within the written limits.

TH1878 wrote: »

nor would they attempt to - this legislation wasn't designed to catch people in the OP's position.

I agree that the expressed intent wasn't to catch such people but look at how small the numbers are in the HMRC examples. They aren't remotely close to being big enough to only affect the wealthy who are the theoretical targets, for some definition of wealthy.

Even when reducing the 1% of lifetime allowance to £7,500 the threshold was left at doing it once, instead of having it done two or more times and with new money on the second or subsequent occasions, which would have dealt with the expressed concern of it being used regularly each year to reduce tax on normal income.

Because of the low example values I think it's prudent for people to arrange their affairs so that at least one of the tests other than intent is not met.

jamesd

madeinireland wrote: »

Will I fall foul of the recycling rules ?

Depends on how good HMRC is at mind reading to know your intent.

madeinireland wrote: »

Last year I made a significant SIPP contribution of £50k grossed up to £62500 - I had income to support the contribution but the funds were from savings.

Last year or last tax year? I'll assume last tax year.

madeinireland wrote: »

This year I made a £24k contribution grossed up to £30k - again this was from savings. ... I intend to take a full TFLS from the SIPP next March when I am 55

See example 2. You rely on the opinion of HMRC as to whether they want to take money from you or not.

Say you instead wait until 6 April 2017, the 2017-8 tax year. Last tax year was 2014-5, three years in advance. This tax year is 2015-6 a lower contribution. Next year 2016-7 will presumably also be lower. So you would have established that your pension contributions were lower during the two tax years before the tax year in which you took the lump sum than previously. Example 3 mentions looking back ten years so this may not be sufficient but at least it's a start.

jamesd

dptp1 wrote: »

Present pot £126k. I would utilize 14/15 earnings and carry forward rules for addn contibution this tax year of £32k net, money would come from cash ISA, originally from inhertance 6 years ago.

So a total pot size of £166k and 25% tax free lump sum potential of £41.5k.

Frankly since you stopped working I think it would be perverse for HMRC to apply the recycling rule to you. You're just using the last year of earned income while you can. But I don't rule out HMRC being perverse.

I suggest that you at least start capped income drawdown this tax year to get out £12,500 and another £7,500 next tax year, even a week or two later.

Now look at the five years of the cumulative basis calculation. Would your average contributions be higher or lower? Depends what you paid in during the last two tax years before the one we're in now but you can probably ensure that you do not meet the cumulative basis test quite easily at this point.

madeinireland_2

Yes but I am also trying to minimise LTAimpact as well - so keen to get on with it in March 2016 if I can.

If I stop work around the same time does that put me in the clear.

Also can't I argue that I am minimising LTA impact - I had no idea the LTA was going to be reduced so they can hardly say that I preplanned it all ?

madeinireland_2

Hang on having read your example 2 it seems to be only a issue if you use the funds to refund another pension.

I won't be doing that as I will be using the funds to live on so I assume I am ok - can you confirm ?

Thanks.

jamesd

I can't confirm because it is up to the opinion of people at HMRC. It's better than it could be, though.

madeinireland_2

Is it worth rinning them to get their opinion before I do it ?

jamesd

I wouldn't. It would only attract their attention and increase the chance of trouble.

dptp1

jamesd wrote: »

So a total pot size of £166k and 25% tax free lump sum potential of £41.5k.

Frankly since you stopped working I think it would be perverse for HMRC to apply the recycling rule to you. You're just using the last year of earned income while you can. But I don't rule out HMRC being perverse.

I suggest that you at least start capped income drawdown this tax year to get out £12,500 and another £7,500 next tax year, even a week or two later.

Now look at the five years of the cumulative basis calculation. Would your average contributions be higher or lower? Depends what you paid in during the last two tax years before the one we're in now but you can probably ensure that you do not meet the cumulative basis test quite easily at this point.

Thanks again for your input, Jamesd. Seems to me this is all very uncertain and a little complicated. I calculate that the net benefit, leaving out investment returns, of moving £32k from a cash ISA to a SIPP is as follows: Tax relief gain £8k. Tax payable on drawing down £40k less TFC @ 25%, £10k = net £30k @20% (drawn over several years) = £6k. Net overall gain is £8k - £6k = £2k. Further, I would lose the ability to access the cash as freely as in an ISA plus, on a cash deposit basis, the ISA, or wef April 2016 any good savings a/c, would has better net interest rates, like for like, than can generally be found within a SIPP plan offering cash deposit facilities. Sorry if this thread has become corrupted into a SIPP vs ISA argument, but as a basic rate tax payer putting tax free ISA money into a SIPP, apart from the aspect of initial tax relief, it would result in incurring tax when income payments were taken. As I say, the plus side is the tax saving on the TFC, in this case £10k @ 20%, but at the cost of flexibility of access to funds. Any opposing views on this?

kidmugsy

dptp1 wrote: »

Net overall gain is £8k - £6k = £2k.

For a 20% taxpayer the gain is currently 6.25%. Not per annum; just 6.25%. That assumes that you pay 20% tax on the money coming out of the pension too.


UPDATE: plus the potential long term advantage of avoiding Inheritance Tax, if the rules there should survive Mr Balls. And the potential for a widow to "inherit" the pension money free of income tax.