Recycling Of Pension Commencement Lump Sum

jonbo300

Hi All.

I'd be very grateful if you could clarify a point regarding the treatment of pension commencement lump sums.

I was an air traffic controller but lost my medical licence to work due to a mini-stroke. As a result of this disability, my employer paid out a lump sum which was the equivalent of 2 years salary to compensate for my loss of the medical licence to practice. This was paid from a loss of licence insurance policy held by my employer with an insurance company.

The compensation sum was ruled as taxable income by HMRC and a payment of £110000 was paid as an employer pension contribution into my company pension two weeks ago using the Carry Forward Unused Annual Allowance For Pension Contributions from the 3 previous tax years, as I had plenty allowance available to do so.

I have just taken early retirement aged 57 and intend to take my pension benefits immediately. I wish to take a tax free lump sum of £100000 in the next few weeks and start flexi-access drawdown from my fund at the same time.

I would like to make sure that I would not be affected by Unauthorised Payments: Recycling of Pension Commencement Lump Sums as in the HMRC publication RPSM04104990and face a possible tax charge in taking the tax free lump sum.
I wish to check that the recycling rule does not apply to me as I believe that Example 11 in the HMRC publication shown below applies in my situation

RPSM04104990 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Examples
Examples to illustrate when the recycling rule does not apply
Example 11 - Financial settlement

"An individual receives a payment following a financial settlement (such as a settlement on divorce/dissolution of a civil partnership or a compensation settlement). The member decides to pay some of that financial settlement into a registered pension scheme. At around the same time the member receives a pension commencement lump sum from a registered pension scheme. The contribution will not be regarded as caught by the recycling rule as it was made because of the financial settlement and not because of the lump sum (the individual did not pre-plan to use the pension commencement lump sum as a means to pay the significantly greater contributions)."

I'd be grateful for any comments by our tax experts, and perhaps details of any previous examples of HMRC interpretations in similar circumstances.

Thanks again,

Much appreciated

jonbo300

Hi All,

I probably should have said that I don't intend making any more pension contributions apart possibly from the £2880 annual contribution before tax. I was very concerned that HMRC would look at the previous two years (2012/2013 and 2013/2014) pension contributions, which were about £18000 gross per year and that they would consider that the pension contribution of £130,000 in 2014/2015 was a significant increase

Thanks again

jamesd

You will not be affected by the recycling rule. Your situation is clearly not one where there was pre-planned increase in contributions with the intention of using the lump sum to repay the money in some way. Rather, the extra payment happened because of the insurance payment which was due to an unexpected and unpredictable medical event. This is also something that you can easily prove so no need for concern.

Normally I write about the financial limits in this context but in your case there is clear absence of pre-planning so you're fine however large the amounts involved are.

Just take the money and use it in whatever way delivers you the most benefit while you're retired.

No need to worry about the £3600 a year gross of pension contribution, just make those as a matter of routine.

jonbo300

Hi jamesd,

Thanks so much for your quick reply. I really appreciate your time answering my query, and for putting my mind at ease. I wasn't sure how HMRC would view my situation. But, as you state, there was no pre-planning involved!!

Thanks again for your help. Much appreciated.

jonbo300