Flexible drawdown while still working to maximise LTA

kidmugsy

madeinireland wrote: »

Two years ago I made a 50k SIPP contribution - last year I made a 24k contribution.

One question for hmrc is whether you made those contributions as part of a plan, in anticipation of withdrawing the TFLS. I think you could very plausibly argue that you didn't because it was only with Osborne's announcements in March 2014, and then Autumn 2014, that the pension laws changed to incentivise a change of your plans.

I recommend two things. (i) Go to the hmrc website and read up on recycling restrictions. (ii) Go to an accountant who is familiar with the interpretations of these rules that hmrc are wont to make.

I suspect that "I plan to leave work at or around the time I take the TFLS out of my SIPP" will get you out of trouble because hmrc say that it's not their intention to inhibit ordinary retirement planning. If you actually retire, you would seem to be safe. But ask a suitable accountant.

madeinireland_2

Thanks - I do find it strange that the rule is about recycling and if after I take the TFLS I don't then made a further pension contribution I can be accused of recycling as not a single penny would actually be recycled.

jamesd

PKY wrote: »

How is the "expected contribution for that year" calculated? Is it the value of PCLS -2 or the average of (PCLS -2 ) + (PCLS -1)?

The difference between the years before the five year period starts and the five years. The rule we're discussing is the one in RPSM04104940 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Significant increase in contributions. The HMRC example 6 covers this case:

"Example 6 - Illustration of the cumulative basis

In the tax year (year 1) in which a pension commencement lump sum of £35,000 is received by a scheme member, who intended to use that lump sum to increase contributions to a registered pension scheme, the contributions to registered pension schemes relating to that member increase from the previous 10 years’ annual contributions of £10,000 to £10,500 - as it is an increase of 5%, the amount by which the contributions have increased in that year is not a significant increase.

In the following tax year (year 2) the contributions increase to £11,000 - an increase of 10% on the usual contributions of £10,000 for that year (the amount of annual contribution that would have been expected before the payment of the lump sum). This is not a significant increase as the £1,000 increase, in itself, is less than 30% of the usual annual contributions and the £1,000 increase and the increase in year 1, together, do not exceed the 30% limit (year 1 increase of £500 plus this year’s increase of £1,000 = 15% of the amount of usual annual contributions of £10,000 for year 2).

In the next following tax year (year 3), contributions increase to £12,000 - an increase of 20% on the usual contributions of £10,000 for that year (the amount of annual contribution that would been expected before the payment of the lump sum). This is now a significant increase in contributions as, cumulatively, the amount of the increase - £3,500 - is more than 30% of the amount of contributions that might be expected in that year (year 1 increase of £500 + year 2 of £1,000 + this year’s of £2,000 = 35% of the usual annual contributions of £10,000).

However, the recycling rule is not triggered as the significant increase in the member’s contributions - £3,500 - does not exceed 30% of the amount of the pension commencement lump sum (lump sum of £35,000 x 30% = £10,500).

RPI is not required because the “current value” of contributions was £10,000.)"

PKY wrote: »

Also you say "if you enter Drawdown you will activate a reduced annual contribution limit of £10,000" but others on this forum lead me to believe that I could go into flexi access drawdown crystallising the fund taking the PCLS but if I do not withdraw any more money I can keep making full pension contributions, £40K earnings permitting.

Entering drawdown is OK, just don't take out more than the 25% tax free lump sum because it's that which causes the drop, not taking the 25%.

mania112

Ok I wasn't aware of that - I thought all drawdown activated the MPAA since 6th April, but it seems PCLS isn't a trigger of the reduced £10,000 allowance, only taking an income thereafter.

EDIT: So if you don't trigger the MPAA, you also won't trigger a stop on the ability to Carry Forward?

mania112

PKY wrote: »

These are my actual contributions. I want to crystallise my £400K SIPP this year and have no intention of recycling contributions. I just want to be sure of not falling foul of the 30% rule. How would the calculations work with these figures? With that large payment and carry forward figure for PCLS-2 am I in the clear?

2013-14 £140K
2014-15 £17K
2015-16 £53K
2016-17 £ ? would like to make £40K
2017-18 £ ? would like to make £40K

I would suggest you average the first 2 years = £78,500
Year 3 (AKA PCLS Year) = £53,000
Year 4/5 = £40,000 pa

So you don't have an increase. No problem.

You also won't fall foul of the other 30% rule, because 30% of the tax free cash is only tested against ADDITIONAL contributions, of which it doesn't seem there are any.

So the only thing I think you need to consider is if you are earning £40,000 pa (you can only contribute 100% of your salary), and ensure you don't take an income from the pension.

kidmugsy

madeinireland wrote: »

Thanks - I do find it strange that the rule is about recycling and if after I take the TFLS I don't then made a further pension contribution I can be accused of recycling as not a single penny would actually be recycled.

That's because hmrc are not mugs. Just stop and think about it for a moment.

jamesd

mania112 wrote: »

Ok I wasn't aware of that - I thought all drawdown activated the MPAA since 6th April, but it seems PCLS isn't a trigger of the reduced £10,000 allowance, only taking an income thereafter.

EDIT: So if you don't trigger the MPAA, you also won't trigger a stop on the ability to Carry Forward?

Yes. Just stick to 25% and smile. You're not the only person who's been caught out that way. I didn't get my description of the relevant 30% rule down very well either, thanks for the clarification/correction.

jamesd

mania112 wrote: »

I would suggest you average the first 2 years = £78,500
Year 3 (AKA PCLS Year) = £53,000
Year 4/5 = £40,000 pa

So you don't have an increase. No problem.

The increase in the five years is based on the typical contributions before the five year period started. It's why I stuck to the HMRC example because we don't know what the base level before the five years started is.

It is not the first two years of the five year period set the basis level for the final three years. That catches people out because they think in terms of recycling after receiving the PCLS but HMRC is also trying to catch people who might borrow before taking the PCLS, then repay the borrowing using it.

PKY

I'm trying so very hard to understand this recycling rule but there seems to be contradicting information.

For example in the HMRC examples that jamesd points to:
Example 2 they look at the how the contributions have "fluctuated in the 5 years (years 1 to 5) leading up to the year in which the member takes a pension commencement lump sum (year 6)." (PCLS-5 through PCLS-1)
Example 6 they look at " the contributions to registered pension schemes relating to that member increase from the previous 10 years’ annual contributions of £10,000 to £10,500" from the year in which the PCLS is taken. (PCLS-10 through PCLS-1)

In your last post jamesd
"The increase in the five years is based on the typical contributions before the five year period started. It's why I stuck to the HMRC example because we don't know what the base level before the five years started is."
and as HMRC RPSM04104950 the five year period is PCLS-2 through PCLS+2 so the 10 years? before that period is PCLS-12 through PCLS-3

confusing!

madeinireland_2

Confusing to say the least.

Ok - so I'm sure I've seen it state that if your TFLS does not exceed 1% of the LTA then you don't breech the rule.

So is the easiest way for me to avoid any chance of a problem to just take out £12500 of my £100k pension one year and take the other £12500 out the following year ?

Thanks...