Flexible drawdown while still working to maximise LTA

jamesd

madeinireland. Close. The rule was changed from 1% of lifetime allowance to £7,500 from 6 April 2015.

PKY, yes, it's confusing and some of my own previous descriptions of this particular rule have been poor to wrong.

Overall it's frustrating that rules supposedly intended to catch the rich abusing the system when lifetime allowances were much higher than they are now, have HMRC examples and limits so low that they can even catch out those with the £50,000 average pension pot size who increase pension contributions as they approach age 55 or retirement.

PKY

jamesd. Frustrating rules, yes I was thinking the same thing. These rules catch anybody who ramps up their pension provison 10 years or more ahead of retirement. Isn't that what most self employed do?

I don't even want to take the PCLS and I'm being caught by a recycling rule! I'm trying to maximise my LTA.

PKY

Do we think HMRC are measuring the amount contributed in a year including carry forward monies or the total contributions assigned to the relevant tax year after using carry forward rules?

I only started my pension 10 years ago. I've used carry forward rules to maximise contributions in good years. I have no normal annual contribution except that for the last 5 years I've been trying to use my full annual allowances eventually. The annual allowance dropped from £50K to £40K last year. So on average my contributions are falling!

Will that satisfy HMRC?

madeinireland_2

Taken from hmrc website

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RPSM04104940 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Significant increase in contributions
What is a significant increase in contributions?

[Paragraph 3A Schedule 29]

One of the conditions for the recycling rule to apply is that there is a “significant increase” in the amount of contributions paid:

by the member to any one or more registered pension schemes
on behalf of the member to any one or more such scheme (for example, where the spouse of a member makes contributions on behalf of that member), or
by an employer or employers in respect of the member to any such scheme.
(Including any combination of the above.)

As a rule of thumb, HMRC accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

The amount of additional contributions is measured on a cumulative basis to determine whether or not a significant increase has occurred. See RPSM04104950 for more information about the cumulative basis.

The underlying principle of whether or not there is a significant increase in the amount of contributions is, first, to establish the amount of contributions that might have been expected to be paid in the absence of a pension commencement lump sum and then compare that amount with the contributions that have been paid as a result of receiving the lump sum.

The fact that there has been a significant increase in contributions in conjunction with the taking of a pension commencement lump sum that, itself or together with other such lump sums taken in the previous 12 months, exceeds 1% of the standard lifetime allowance, does not necessarily mean the recycling rule will be triggered. Even though such an increase might be a significant increase, this would not trigger the recycling rule where the significant increase is not as a result of taking the pension commencement lump sum.

For example, an individual’s contribution pattern might vary from year to year but the basis on which those contributions are paid does not change. Another example would be where an increase is, in effect, beyond the control of an individual, such as where contractual contributions in respect of the membership of a particular scheme are increased across the board for all active members of that scheme. These increases may be significantly greater than the previous year’s contributions, but the increases are not “because of” a pension commencement lump sum, and so the recycling rule is not triggered.

Glossary (RPSM20000000)

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So Jamesd - I took the information direct from the hmrc website that someone mentioned above...

1. It states 1% of the annual allowance which I make £12500 but you suggested this had recently changed - but strange that their own website seems to disagree.
2. It says to measure the increase in contributions it uses the contribution after you made after you collected the lump sum and compares with the contributions before - since I will not make contributions after or they will be at least much smaller how will they be able to determine a significant increase ?

Thanks...

PKY

2. It says to measure the increase in contributions it uses the contribution after you made after you collected the lump sum and compares with the contributions before - since I will not make contributions after or they will be at least much smaller how will they be able to determine a significant increase ?

But did you look at RPSM04104950? They check for increased contributions before the PCLS too.

from the HMRC website

What is the cumulative basis on which the significant increase of contributions is based?

[Paragraph 3A Schedule 29]
An individual planning to increase contributions significantly to a registered pension scheme when taking a pension commencement lump sum does not avoid the “significant increase” test by increasing contributions piecemeal or gradually over time. It does so by providing for contributions to be measured over a set period of time in determining whether or not there has been a significant increase in contributions.
The period of time is:

• the tax year in which an individual takes a pension commencement lump sum with the intention of using it to make significantly increased contributions to a registered pension scheme
• the 2 tax years immediately preceding the tax year in which the individual took the lump sum, and
• the 2 tax years immediately following the tax year in which the individual took the lump sum.

madeinireland_2

Damm - there seems to be so many ways of looking at this and I just dont get it.

Here were my contributions over the last few years for both my DB and SIPP - after I take my TFLS this year I probably won't have any further contributions...

08/09 = 48967
09/10 = 40000
10/11 = 62742
11/12 = 37840
12/13 = 6560
13/14 = 86809
14/15 = approx 57000
15/16 = smaller pension contribution to DB scheme - say 20k (not known yet) but take TFLS of 25000 from 100k SIPP
16/17 = 0
17/18 = 0

So can anyone tell me who may understand all the rules if this would cause an issue and which rule it breaks by using the numbers above by way of example.

Thanks...

jamesd

madeinireland wrote: »

1. It states 1% of the annual allowance which I make £12500 but you suggested this had recently changed - but strange that their own website seems to disagree.

Their web site for recycling hasn't been updated with the changes that were announced last autumn and which took effect from 6 April. My reply did include that change.

madeinireland wrote: »

2. It says to measure the increase in contributions it uses the contribution after you made after you collected the lump sum and compares with the contributions before - since I will not make contributions after or they will be at least much smaller how will they be able to determine a significant increase ?

I am the person who provided the link. It does not say that it is the contributions after. What is says is an increase of 30% then it mentions the cumulative rule that is used to work out the 30%. The related pages which give details of the rule and HMRC example that I pasted show that the increase starts to be calculated from the two years before the lump sum is taken, based on the expected contributions for the years prior to that.

The recycling pages start here. Best to begin there and click on Next Page to read all twelve of them so you get the overview then the more detailed rules and examples of how HMRC interprets the rules. The only significant error in the HMRC pages is not yet being updated to £7,500.

jamesd

madeinireland wrote: »

Here were my contributions over the last few years for both my DB and SIPP...
08/09 = 48967
09/10 = 40000
10/11 = 62742
11/12 = 37840
12/13 = 6560

It might be hard to work out what our expected contributions would be because of the big drop. If HMRC was to use the average it'd be £39,168. They don't tell us how they work out what number to use.

The rest of this can be confusing so to start not that there are two different 30% rules:

1. Has the annual contribution increase by more than 30% from what was expected based on the years before the five year period?
2. Is the increase more than 30% of the value of the tax free lump sum. This is the one that will probably protect you if you have a big enough lump sum available to take.

If you can stay within either limit you're safe.

madeinireland wrote: »

13/14 = 86809

86809 / 39168 * 100 = 221%. Because this is more than a 30% increase (130%) it would appear that you breached the 30% cumulative rule in 2013/14 ir you proceed as planned.

madeinireland wrote: »

14/15 = approx 57000

And still over in 14/15 as well.

madeinireland wrote: »

15/16 = smaller pension contribution to DB scheme - say 20k (not known yet) but take TFLS of 25000 from 100k SIPP

So an aggressive HMRC person can conclude that you couldn't really afford the contributions made in the two previous years and had to drop them back, subsidising them with the tax free lump sum. If they can find evidence of this, like borrowing or moving money from savings then using the lump sum to replace the savings. Yet the lump sum is only 25k and that's not enough to cover the increase.

madeinireland wrote: »

16/17 = 0
17/18 = 0

Too late, already over the 30% cumulative rule limit so you'd need to work out how they charge the penalties if that is the only rule used.

But it's not that simple (complicated...). They look at what would have been expected. For your DB pension that's just whatever your pay causes. So if you got a promotion and that increased the payment in the five year window, they would disregard that much of the increase because it was expected and not due to the tax free lump sum.

You had a big drop in 12/13. The reason for that drop matters. If it was some temporary effect it might be disregarded by HMRC and they might use the average of the four years before that instead of including the lower year. You'd still be massively over a 30% increase in 13/14 so it wouldn't be enough to save you.

It's also not that simply because there is another rule: the increase is OK if it is less than 30% of the value of the lump sum, as HMRC wrote in the example I pasted. That's not much help when the lump sum is £25,000 because 25% of that is only £6,250. Say instead of taking a tax free lump sum of £25,000 you took a tax free lump sum of £250,000. 25% of that is £62,500 and now we have something to work with:

madeinireland wrote: »

13/14 = 86809

86809 / 39168 * 100 = 221%. Because this is more than a 30% increase (130%) it would appear that you breached the 30% cumulative rule in 2013/14 ir you proceed as planned. But now we use the other 30% rule, 30% of the lump sum. The increase is 86809-39168 = 47641. This is less than 30% of the lump sum so it is not prohibited recycling and you have 62500-47641 = £14,859 of the tax free lump sum's 30% allowance to work with still.

madeinireland wrote: »

14/15 = approx 57000

And still over in 14/15 as well. But now we use the higher lump sum. The increase this year is 57000 - 39168 = 17832. You only have 14859 of the 30% of the lump sum left and you are 2973 over that. So now you have breached both of the 30% conditions and are recycling (if it was preplanned and HMRC has to somehow claim that). But you could instead increase the tax free lump sum you take by 2937 * 4 = 11892. Then you'd still be just at the edge of the other 30% rule and not considered to be recycling.

madeinireland wrote: »

15/16 = smaller pension contribution to DB scheme - say 20k

20k is less than 39168 so the 30% of lump sum calculation isn't affected and you'd be fine if only you could take a tax free lump sum of at least £261,892.

madeinireland wrote: »

So can anyone tell me who may understand all the rules if this would cause an issue and which rule it breaks by using the numbers above by way of example.

Not reliably, there's too much that HMRC doesn't tell us and too much open to interpretation by them in deciding what contributions were expected.

Because I don't know the basis for the changes in DB contributions or the AVC and personal pension ones this isn't really an accurate description because the reasons for he changes matter. But on the face of it you should be in a pretty decent position if you can take a tax free lump sum of at least £261,892. The more you can take, the more margin you have from the 30% of the lump sum rule.

It may seem odd that I'm telling you that a bigger lump sum is better to avoid the recycling limits but that's the way it works.

If you think all of this post is as clear as mud, congratulations, you understand the lack of ease of use of the recycling rules. A lot is left to HMRC's interpretation.

madeinireland_2

Thanks Jamesd - clear as mud lol - I may have to read all this a few times to get it to sink in.

I will not be able to take a higher lump sum till I take my DB scheme which won't be for about 5 years or so. I am restricted to the £100k SIPP.

The increases in DB scheme amounts were due to normal pay rises and bonuses and additional AVC scheme contributions from salary.

I stopped them for a year and got a very small rise hence the big drop for one year. I then started to contribute big time to my SIPP.

So I guess I have a couple of options if I understand this correctly...

1. Only take 7500 per year.
2. Wait two years and then I will be clear to take it all. If this is not correct then when can I take my lump sum as I thought this would all be easy ?

I feel I may need to visit an advisor to get to grips with all this.

Thanks...

PKY

The lump sum recycling rule part that is most likely to apply to you is the one that says that you can be charged if you have increased your pension contributions by more than 30% over the two tax years before you take the lump sum, the year you take it, and the following two years. If you have a record of high contributions already it could be easy to pass this test.

Because I have made a large pension contribution 2 years ago using the carry forward rule are my plans to go into FAD this year doomed?

How would I fare using the argument that I am going into FAD because of the recent announcement of a reduction in LTA. Which is true!

From the HMRC website

Circumstances where the recycling rule does not apply

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.
The mere fact that the pension commencement lump sum is paid into the same bank account as that from which savings were taken to make the increased contributions does not of itself mean that the contributions have been paid “because of” the lump sum. The individual must still be shown to have intended to use the lump sum as the indirect means of making the increased contributions.
The recycling rule is not intended to apply to individuals who simply increase contributions to registered pension schemes (or who have increased contributions paid in respect of them, such as by way of salary or redundancy sacrifice) with the intention of increasing the benefits that will ultimately be paid from those schemes, particularly a pension commencement lump sum. This is provided no pension commencement lump sum is actually used as the means to increase those contributions, whether in a direct or indirect way. This is because the recycling rule applies only where contributions are significantly increased “because of” the lump sum.
Also the recycling rule does not apply where an individual takes a pension commencement lump sum and, when taking that lump sum, had no intention of using the lump sum as a means, whether directly or indirectly, to pay contributions into a registered pension scheme. This is because the recycling rule applies only where the recycling was planned before the first relevant transaction.