Recycling tax free cash - am I ok

moedeeb

Hi, I was lucky enough to get a TFLS from an old DB preserved pension in April last year. I was 50 (now 51) and the pension was part of a compromise agreement on redundancy where I had a preserved retirement age.

My pension from April 2014 is 13K per year and the TFLS was £78K. Im still working and a 40% tax payer (without taking the new pension into account).

For the last 8 years or so I have been paying £418 per month into my employers DC pension. In September 2014 I upped this to £628 so by my calculation I paid an additional 29% more than my normal previous yearly contribution in 2014 /15. So I hope that I have not triggered the recycling thresholds for year 1 following my TFLS which I understand to be a 30% increase.

Now the interesting bit, in an astounding turn of fate I actually got a pay rise this year of 2% and I decided to put all this increase into my pension. This means that if I leave the contribution as now selected I will be increasing my contributions beyond the 30% threshold established by my previous contributions in the last 8 years.

Obviously I also have a larger income (based on the actual DB pension) and I could argue that the additional contributions are available as an indirect consequence of this. I am also thinking about eventual retirement proper and could sensibly argue that my additional contributions are part of planning for this.

So any advice on whether I should leave things as I now have them? I could obviously reduce the contributions in 2015/16 to keep below the 30% rule but I have no idea how a pay rise which has absolutely nothing to do with my lump sum could cause me and my DB scheme administrators tax problems.

Thanks in advance for any help

coyrls

I was just researching this myself for a different thread on this forum. I think you're ok with the increased contributions. See the examples here: http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104990.htm
and the principles here: http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM04104925.htm

moedeeb

Thanks, after having looked at these examples I think I will be OK as whatever I do in years two and three, I wont end up putting more than a cumulative 30% of the original lump sum in my DC pension. It will be more like 9%. What is interesting is that you have to trigger all the criteria to hit the dreaded "unauthorized" payment recycling rules penalties.

This just shows what a minefield all this can be. Having had a look at the "pension wise" site which goes nowhere near any of this complexity I can see people falling into tax issues with the new Pension freedoms. But obviously buying a Ferrari doesn't count as recycling!

mania112

Another rule is that the additional contributions cannot exceed 30% of the TFC amount

The additional amount you're paying in is less than (£78k x 30%) £23,400.

You should be fine thanks to this final point.

Also, you should be aware that the 2x '30% rules' span the following 2 years from the year in which the tax free payment was made.

Also, these rules are not set in stone and are not designed to catch up genuine retirement plans, which is what yours is.