Use pension @ 55 & pay towards mortgage

mikrt

I'd be very grateful if someone could confirm whether something a friend told me is correct.

I was planning to take my 25% lump in 5 months time when I reach 55.

I intended to pump this into my mortgage (still have 8 years left), and then with the mortgage payment I'd be saving, to increase my monthly pension by that amount.

He tells me the HMRC would take a slice of this, is he right?

If he is, could I keep my monthly mortgage payments the same, but reduce the length of mortgage?

I'm still working, and intend to until 67 (or whatever it'll be then)

Thanks,

Mike

dunstonh

He tells me the HMRC would take a slice of this, is he right?

No. He is wrong. It may not come as much surprise when I say that the 25% tax free cash is tax free. That is why it is referred to as tax free cash.

mikrt

Ah, I didn't explain very well.

He didn't say the 25% lump sum would be taxed, but the extra payments into the pension.

camelopardis

I am most certainly not an expert but might this count as recycling? I'm sure those more in the know will be along soon

Bazofts_Revenge

Wouldn't it only count as recycling if the new pension contributions came from the Lump Sum. If it was money from earnings then I believe it should ok.

kidmugsy

Bazofts_Revenge wrote: »

Wouldn't it only count as recycling if the new pension contributions came from the Lump Sum. If it was money from earnings then I believe it should ok.

No, hmrc are not that daft.

There is no substitute for looking at the recycling rules themselves, and perhaps at the commentaries on them on the websites of the big insurance/pension companies.

Bazofts_Revenge

Googled it and it looks pretty straightforward set of rules. Keep within the quoted percentages and you will be fine.

mikrt

Thanks for all replies,

I have googled and read a few different versions.

As I now understand it, to breach recycling rules,

I'd need to increase my monthly pension contributions by more than the maximum 30% of the usual. (Now £400/M so to £520/M)

AND,

Increase the pot by 30% maximum.

As I'm only doing one of those, I should be OK.

Is that correct?

jamesd

mikrt wrote: »

I was planning to take my 25% lump in 5 months time when I reach 55.

I intended to pump this into my mortgage (still have 8 years left), and then with the mortgage payment I'd be saving, to increase my monthly pension by that amount.

It's fine and HMRC will not charge anything extra.

Your pension contributions are clearly going to come out of income. That's not recycling of a lump sum. Having a higher unused income to use for pension contributions because you paid off debt doesn't make you subject to those rules.

You didn't borrow the money to allow you to increase your pension contributions. You borrowed the money to buy your home. So that borrowing is irrelevant for the recycling rules.

The recycling rules are very widely misunderstood.

jamesd

mikrt wrote: »

As I now understand it, to breach recycling rules, I'd need to increase my monthly pension contributions by more than the maximum 30% of the usual. (Now £400/M so to £520/M)
AND,
Increase the pot by 30% maximum.
As I'm only doing one of those, I should be OK.
Is that correct?

No. The rules are given in Unauthorised payments: deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums and the following pages.

"The recycling rule applies when all of the following conditions are met:
o the individual receives a pension commencement lump sum
o because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be. Further guidance about what is a significant increase in contributions is at PTM133830
o the additional contributions are made by the individual or by someone else, such as an employer
o the recycling was pre-planned. Further guidance about determining whether the recycling was pre-planned is at PTM133820
o the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12 month period, exceeds £7,500 for events on or after 6 April 2015, or 1% of the standard lifetime allowance for events before 6 April 2015 and
o the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830

It should be noted that very few lump sum payments will be affected by this recycling rule. Pension commencement lump sum payments will not be caught if they are paid as part of an individual’s normal retirement planning."

You are not affected by the recycling rules because:

1. You did not borrow the money with the intent of increasing your pension contributions with the borrowing then repaying the borrowing with the lump sum. You borrowed to buy the property. Your pension contributions didn't increase because you borrowed the money. Your plan will show them increasing when you have repaid it instead.

Planning to repay a debt then using the reduced debt payments to increase payments into a pension isn't what the recycling rule is about and nobody doing that will be affected by it even if it was pre-planned to do that. It's only when pre-planning to do the borrowing for the purpose of increasing that it can apply.

You've grossly misunderstood the 30% rule, though.

The cumulative 30% rule applies to the two tax years before taking the lump sum, the tax year of taking the lump sum and the two following tax years. Presumably you didn't increase your pension contributions two years ago so you'd still have the whole 30% of the lump sum to use for increases, which roughly allows an increase of 10% of the lump sum a year for the current and next two tax years. Note that it is a percentage of the lump sum, not a percentage of your monthly payments!

Say you took a tax free lump sum of £100k. 30% of that is £30k so on average you could have started to increase your pension contributions by 30000/5/12 = £500 a month for all of those five years. Assuming you didn't increase for the first two years you could instead increase by 30000/3/12 = £833.33 a month.

There is no rule relating to the increase in the size of the pension pot, not 30%, nor anything else. It's all about money paid in.

jamesd

Bazofts_Revenge wrote: »

Wouldn't it only count as recycling if the new pension contributions came from the Lump Sum.

Not always. If you spend down savings then top them up with the lump sum or if you borrow short term to pay more than repay the borrowing that can be recycling. But a mortgage isn't that sort of borrowing.

Repaying debt then having more unused income to make contributions with isn't the sort of thing that the rule is designed for and it'll never be caught up in it because HMRC knows the purpose of the rule and wouldn't even seek to apply it.