Can husband give his 25% tax free sum to me to reinvest in my pension pot?

PensionTech

Your scenario is backwards. You are supposing that a law has already been broken by the husband and that may allow HMRC to undo the gift-giving (and I am not sure whether it would; that is outside my area). But that is irrelevant; we are being asked whether the gift-giving, and its result, is in itself breaking the law. And I conclude, for reasons already given (i.e. that the law itself has been examined and does not proscribe what is being proposed) that it is not. Therefore there is nothing for HMRC to challenge in the first place.

jamesd

RickyB2000 wrote: »

I don't know, but this may be against the spirit of the law that prevents recycling tax free lump sums into pension schemes. Depends how much you are putting in (think around £7k is allowed).

You think wrong. There is no restriction at all on a person taking money from a pension and giving it to another person to put into a pension unless it is the giver's pension.

One of the recycling safe harbours is £7,500 but there are others that are usually higher, that one is just an easy bright line to tell people that if they aren't getting lump sums worth more than £7,500 in a twelve month period (not tax year, 12 months) they don't even have to look at the more generous rules. But all of this only applies where the lump sum comes from the pension pot of the person getting the increased pension contributions and that doesn't apply here.

The stuff about other people paying in is because anyone can pay into a pension for another person, so I could give you money and you could pay it into a pension in my name. Or more realistically, I could take a lump sum and increase salary sacrifice so my employer paid into my pension. The rules are designed to catch those cases. And even with those there are plenty of things that are still allowed, like just normal increases as part of retirement planning.

jamesd

NKS wrote: »

I'm not sure if money from a spouse classes as 'taxable income' - if it does then surely the pension contribution would attract 40% relief?

A gift from a spouse is not taxable income and does not affect your income tax position.

NKS wrote: »

As extra income, would it attract 40% tax relief (that would be nice) or 20%? Or some mix of the two?

You get 40% tax relief on the portion of your income that is above the higher rate threshold and 20% on the amount below it.

Lets pretend that you have a taxable income £2,000 above the higher rate threshold and make a gross contribution to a personal pension of £1,000 (net £800 actually deposited by you). You will get 25% added as basic rate tax relief by the pension provider you put the money with to give you the first £200 of your relief. When you tell HMRC about it they will increase your basic rate tax band by £1,000. that will exempt £1,000 of your income from higher rate tax and deliver the rest of your tax relief because you'll pay £200 instead of £400 income tax on that £1,000. And at that point you'll have received the full £400 of higher rate tax relief on the money.

If you instead paid in £4,000 gross your basic rate tax band would be increased by £4,000 and that would take all of your income out of higher rate tax but because you only had £2,000 of higher rate income you only benefit by reduced tax on that £2,000 of higher rate money. In this case you get 40% relief on half of it and 20% relief on the other half.

You don't need to use a tax return to tell HMRC, you can use a letter, phone call or one of the notices about an incorrect tax code to tell them the amount you estimate you will pay in pension contributions. They will then adjust your tax code to give you the relief during the tax year so you don't need to wait for it.

NKS wrote: »

Recycling seems to be about a cycle of taking out and putting in and taking out again once people are over 55 - I can see how the govt wont like that to be an ongoing thing. ... I see that the original idea of taking a large lump sum from his pot to boost mine is definitely not approved. Shame - was a nice idea while it lasted! We do have some other savings which it may be worth putting into his or my pension this year though if we can get 20% relief on it.

It's entirely approved but a lot of people just have no idea of what the recycling rules are for or how they work. It's very rare for HMRC to even apply them, I forget the exact answer but the number of cases where they had was nil as of October 2015.

The big issue they are trying to stop is organised schemes where a firm sets up a plan and sells it to the masses. Next down was individuals with large amounts of money doing it with say half a million Pounds year after year. Or firms paying employees over 55 in pension contributions that the employees then cash out to avoid NI on their pay. The annual contribution limit for pensions has now been dropped low enough to hugely restrict the potential for such things, way below the quarter of a million Pounds it used to be at. Now as soon as you take more than the tax free lump sum out of a personal pension (not defined benefit) you have your annual contribution allowance reduced from £40,000 to £10,000 and carry forward is banned for you, so that's mostly dealt with the wealthy individual case. A person who's terminally ill isn't restricted in that way and can take a whole pot tax free, as well as making pension contributions.

A person who doesn't mind the £10k limit is pretty much free to pay in and take out £10,00 from pensions year after year to get the tax relief, provided they have qualifying - earned - income of at least £10,000. If not they are limited to the amount they earn or £3,0600 gross a year, whichever is higher. It's pretty much routine to suggest doing that here for those who are retiring or who are 55 or older and on low incomes. There's no recycling rule issue because the tax free lump sum is at most £2,500 for the ongoing drawings and that is below the £7,500 per twelve months safe harbour.

jamesd

Did the IFA give any ideas about what else might be discussed with you? I'm wondering whether there are other aspects of your financial planning that we might usefully consider?

Maximising pension contributions is a big win for you assuming you're 55, or for your husband if he is, because the can't get at the money restriction is gone from age 55. You really can do things like paying in £30,000 gross and taking out £7,500 tax free lump sum every twelve months and not have any trouble at all. £30,000 because that's four times the £7,500 safe harbour level so it ensures that the 25% tax free lump sum is within that amount. Or of course if you're recycling out of income you don't need to worry about the £7,500. Doing it out of income means having the income and not restricting your life style compared to previously, so the £7,500 say goes to increase savings and you're not funding the increased contributions out of savings either. Pooled family resources can facilitate this, just don't borrow and repay or give and repay with the lump sum.

In your case you'd need to watch out for the amount paid in by your DC scheme and your own contributions to it, since the £40,000 annual limit includes them.

RickyB2000

I can't find anywhere that states taking say £25k tax free lump sum, giving it to a spouse who then invests it into their pension is approved (as the opening post seemed to be suggesting). Can someone provide evidence of this? Even the articles that talk about recycling between partners only ever talk about very low amounts (below £7.5k) or those that talk big numbers specifically talk about the income portion of the pension, not the tax free lump sum.

Reading the HMRC rules, they have this statement that would appear to be catch all and cover this scenario:

The recycling rule will apply where an individual envisages recycling a pension commencement lump sum by any means; from simply reinvesting the lump sum back into a registered pension scheme by way of a relievable pension contribution paid by the individual, through to the use of any devices, schemes, arrangements and understandings of any kind, whether or not legally enforceable, that enable the effective recycling of a pension commencement lump sum.

I must say I would like to see some hard evidence that this is approved by HMRC as it would be a nice little earner - esp for two people in their mid-50's where over a few years one could push a large lump sum through the other and basically get another up lift and another lump sum.

dunstonh

I can't find anywhere that states taking say £25k tax free lump sum, giving it to a spouse who then invests it into their pension is approved (as the opening post seemed to be suggesting). Can someone provide evidence of this? Even the articles that talk about recycling between partners only ever talk about very low amounts (below £7.5k) or those that talk big numbers specifically talk about the income portion of the pension, not the tax free lump sum.

You cant find anything that states it is not allowed either.

Reading the HMRC rules, they have this statement that would appear to be catch all and cover this scenario:

The recycling rule will apply where an individual envisages recycling a pension commencement lump sum by any means; from simply reinvesting the lump sum back into a registered pension scheme by way of a relievable pension contribution paid by the individual, through to the use of any devices, schemes, arrangements and understandings of any kind, whether or not legally enforceable, that enable the effective recycling of a pension commencement lump sum.

yes. I posted that earlier and highlighted the key points, which I have done again. A spouse is not the individual.

RickyB2000

dunstonh wrote: »

You cant find anything that states it is not allowed either.


yes. I posted that earlier and highlighted the key points, which I have done again. A spouse is not the individual.

I can find vauge enough references that may imply it is not allowed. Spirit of the law and all that. Would rather see it officially approved (as posted above) rather than rely on my interpretation of the rule.

Actually, the key point in that quote is:

through to the use of any devices, schemes, arrangements and understandings of any kind, whether or not legally enforceable, that enable the effective recycling of a pension commencement lump sum.

Any devices, schemes arrangements and understandings of any kind. Would passing a lump sum to a spouse for the intent purpose of pushing it into a pension to receive additional tax relief be considered an arrangement, a scheme or an understanding......

zagfles

NKS wrote: »

Can my husband give me money he withdraws from his pension pot, so we can reinvest it in mine with tax benefits?

My husband can retire later this year with a 100k-ish personal pension pot. Currently he's on a low salary and we can live on my salary (plus his state pension if we don't save it), so plan to leave his pot untouched for now.

I am sadly not old enough to retire with him (19 yr age gap), but have recently had a pay rise the JUST tips me into higher tax band, so it is worth me using the extra to top up my almost non-existent pension. I want to go part time or freelance in the next few years to spend time with him, so there's a small window of time to make use of this 40% tax relief before we go back to a low joint income.

Question - if husband takes a 25% lump sum and puts the rest into drawdown, can that be put into my pension pot and get tax relief as a contribution (bonus money from government) as long as the amount stays within my annual allowance plus any carried over allowances? As extra income, would it attract 40% tax relief (that would be nice) or 20%? Or some mix of the two? I'm not sure if money from a spouse classes as 'taxable income' - if it does then surely the pension contribution would attract 40% relief?

We did go to see an IFA and these were the sort of creative things I wanted to discuss. But IFA was more interested in selling us new funds once he'd explained about drawdown/Uncrystallised Pension Fund Lump Sums. Do I need an accountant instead? We are not used to having money to think about and plan for!

Many thanks

You and most others on this thread seems to be overthinking this. Why are you looking at it as a gift from your husband to you to put into your pension, when you've just said you're both living on your salary? You're paying his living costs, but he gives you a gift for you to put into your pension? That's money going back and forth.

It's simple. You make pension contributions out of your own earnings into your pension. Your husband uses his TFLS to pay towards your joint living costs. No gifts. No recycling.

jamesd

RickyB2000 wrote: »

I can't find anywhere that states taking say £25k tax free lump sum, giving it to a spouse who then invests it into their pension is approved ... Can someone provide evidence of this?

The recycling rule is about a person who takes a lump sum to reinvest in a pension in their own name. It covers no other cases. As PTM133810 says:

"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"

I've highlighted in bold the key pieces that you have missed. A pension for a spouse is not a scheme in respect of the individual who took the lump sum and since all of those conditions must be met it is not possible for it to be caught by the rule in that straightforward case of a one way gift.

You've quoted some text from later on but you're seem to be completely disregarding the actual rule and the actual law, both of which have already been quoted to you.

RickyB2000 wrote: »

Reading the HMRC rules, they have this statement that would appear to be catch all and cover this scenario:

You're ignoring the actual rule that is given earlier in the text. It's about contributions into a pension for the person who took the lump sum.

RickyB2000 wrote: »

it would be a nice little earner - esp for two people in their mid-50's where over a few years one could push a large lump sum through the other and basically get another up lift and another lump sum.

Yes, it has significant potential for gains to be made. There are also plenty of other ways to make gains. Provided you know and understand the rules and how to stay within them.

For example, subject to the annual limit and income you can take a tax free lump sum of £200,000 and in the third following tax year recycle that into a pension in your own name. This is fine because the cumulative rule does not apply - it ends two tax years after the tax year in which the lump sum was taken - and all of the clauses have to apply for the recycling to be covered.

RickyB2000 wrote: »

Any devices, schemes arrangements and understandings of any kind. Would passing a lump sum to a spouse for the intent purpose of pushing it into a pension to receive additional tax relief be considered an arrangement, a scheme or an understanding......

No, because it is not a payment into a pension scheme of the person who took the lump sum. All of the conditions have to be met and that one is not being met.

RickyB2000 wrote: »

I can find vauge enough references that may imply it is not allowed. Spirit of the law and all that.

The spirit of this law is to stop an individual from doing excessive recycling of lump sums into their own pension pot.

Still, you might find this bit of parliamentary discussion of interest if you want to know more about the legislative intent. Ed Balls being the person responding on behalf of the government and explaining intent.

RickyB2000

I wasn't ignoring it, I just find the term in respect of unclear. For example, if you hand your spouse money to invest in their pension with a written agreement that they would pay you that money back plus the additional tax saving, would it now be considered in respect of the husband? Even though the scheme was not in the husbands name?

It all feels a bit flimsy, anyone who is wealthy probably has their own business so can easily re-org who earns the money in their relationship and by-pass recycling rules. I guess in this case they probably will also be earning money 3 years down the loan so would be able to break the recycling rules anyway. Only PAYE schmuks really get hit.