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

zagfles

PensionTech wrote: »

To be fair, this argument wouldn't hold if they actually were recycling the lump sum. All that is required is for the pension contribution to be substantially larger than it would be if not for the lump sum; the lump sum itself doesn't have to be directly used for the contribution (and in an age of digital money, who can really pinpoint which type of money is directly used for a particular purpose?). If you're paying a higher contribution out of your earnings, but the reason you can pay it out of your earnings is because you have a lump sum to spend on what you'd usually spend your earnings on, it's still recycling (if it's going into your own pension pot).

But because it's not going into the same person's pension pot, it's a moot point, and I'm thoroughly relieved that SippTechie has come in here with some real-life evidence to settle those who seem to want to believe that HMRC's rules go further than they do!

But that's exactly it - it's going into someone else's pot. To have a general rule that you couldn't put your own earnings into your own pension because someone else got a TFLS and that enabled you to would be ridiculous.

To take it to an extreme, what if you are trying to sell your house with no success, but then an interested buyer decided to take a large TFLS from their pension, enabling them to buy your house, and as a result of selling your house, you are now able to contribute all your earnings to your own pension. You are only able to do that because another person got a TFLS!

RickyB2000

jamesd wrote: »

In plain language in respect of means in the name of.

It's not written that way because there are group schemes that could be paid into and which the individual could benefit from and the in respect of wording includes those within the rule.

No, because it was not in respect of the husband, not being in his name or a group scheme from which he would benefit.

Had the wife instead lent him the money which he then used to pay into a pension and repay her from the higher lump sum then it could be covered by the recycling rule if all of the other conditions were met.

Whether gifts between spouses who are both making contributions into schemes in their own names could be construed as loan agreements would depend on the facts of the case.

Have you read the HMRC examples on when the rule does or doesn't potentially apply? They are a few pages on from the one I linked to earlier.

It may seem flimsy but it has done its job. Remember my post earlier where I explained what the rule was intended for? The rule has worked, there are not organised schemes doing recycling for large numbers of people and there are not lots of employers using recycling to pay employees. So HMRC has successfully protected the revenue, the objective of the rule.

That isn't breaking the rules, though, it's a case that they explicitly do not block. As with many tax rules it's possible to plan to avoid being negatively affected and paying more tax if you know the rules and plan your finances to avoid the extra cost.

I wouldn't say so. Remember that to date there are no known cases of HMRC applying the rule. But people can be excessively worried just by the existence of the rules and not plan efficiently as a result, which is what you were encouraging, whether you knew it or not.

But going beyond that, consider this PAYE case that really happened:

1. a person had a work salary sacrifice scheme that had a limit of 50% of base pay being used for contributions to the pension.
2. in the third tax year before the tax year in which the person reached age 55 the person asked the workplace to make an exception to that rule, which was intended just to prevent employees getting into financial trouble by sacrificing too much.
3. the higher pension contribution allowed by that would raise the pension contributions in the tax year before the two years before, year of taking the lump sum and two years after, potentially reducing the amount of increase that could be attributed to the taking of the pension lump sum three years later.
4. they didn't even have to explain to the person on the phone about recycling rules - that person immediately recognised the potential recycling situation and implicitly from the request also knew that the person making the request had a clue as well.
5. the employer agreed. After all, having satisfied that the employee wasn't being foolish, the employer also saved some NI.

The person wasn't a schmuck, just someone who knew the rules and wanted to stay within them by ensuring that they weren't affected by one of the rules. I doubt that the person would have been caught by the rules anyway but there's no harm in ensuring that multiple parts of the recycling rule aren't going to apply, as extra protection.

But it doesn't even take thinking three or four or more years ahead for a PAYE person to benefit if they wanted to. You can do it by thinking ahead about eight weeks, the time it might take to get HMRC relief:

Just pay in £10,000 a year gross, £8k net, each year and withdraw the money once the tax relief has arrived. Repeat every at least twelve months form age 55 until age 75 or until you stop earning enough to pay in 10k. Since the lump sum involved is £2,500 this isn't affected by the recycling rules.

Money in, 8000, tax free out, 2500, after 20% tax on the other 7500 is 6000. So out of 8500 - in 8000 is a gain of £500 every twelve months. Assuming that it's all done at basic rate tax.

Lots of people don't know the rules and what can be done but that doesn't mean there is no potential to benefit once the rules are explained to them. Which is part of what is done in this place.

Good post, esp the point about being excessively worried (which is perhaps where I am). I certainly don't want to encourage poor planning, but this is a little talked about area. I can find nothing on any other site that discusses any of these approaches. Most stick to fairly safe discussions of transferring small amounts of TFLS or large amounts of taxed pension income. Even though I have perhaps annoyed everybody, getting down to this detail and how it can be utilised for tax planning is an interesting eye opener.

RickyB2000

zagfles wrote: »

But that's exactly it - it's going into someone else's pot. To have a general rule that you couldn't put your own earnings into your own pension because someone else got a TFLS and that enabled you to would be ridiculous.

To take it to an extreme, what if you are trying to sell your house with no success, but then an interested buyer decided to take a large TFLS from their pension, enabling them to buy your house, and as a result of selling your house, you are now able to contribute all your earnings to your own pension. You are only able to do that because another person got a TFLS!

The rules state intent though. I.e. the actions were performed with the recycling of a lump sum being pre-planned. So in your house example this wouldn't hold true as the buyer has no intent to contribute their lump sum to a pension and the seller has no intent to make a pension contribution just because the buyer is using a tax free lump sum. Two spouses doing it is clearly pre-planned. Before anyone jumps in, this is a response to a made up scenario, we have established this wouldn't be recycling anyway under the individuals own scheme rule.

Now, if the seller was 55 and made a larger than normal contribution with the aim of getting an immediate tax free lump sum they could be looked at as recycling. Though it could also be normal pension planning. Thoughts?

What if the buyer bought the house with a tax free lump sum, sold it a few months later and contributed to their pension scheme. I guess the £10k contribution limit would prevent recycling here as well

RickyB2000

jamesd wrote: »

You might want to learn about the scheme sanction charge. The scheme would have had to pay a penalty for allowing an unauthorised payment if the rule had been breached so it was prudent for the scheme to check.

You'll also find that most or all pension schemes will ask about recycling at appropriate times and ask you to say that you're not going to do it, so they can follow up with you or just refuse as seems desirable to them.

But if a pension scheme feels it prudent to get a formal declaration of acceptance from HMRC, isn't it also prudent for the person who is going to make the contributions to be crystal clear on this point? What if I read this board, take this view without question, declare to the pension scheme I am not going to recycle and then it turns out I did (not the spouse thing per see but accidentally broke one of the rules thinking it was allowed - so pre-planned). Are you saying the pension scheme will take the hit and I get off Scot free? Or will the scheme insist on knowing and checking the source of all contributions?

Note I do get your point that this rule has never been tested in court or invoked.

RickyB2000

xylophone wrote: »

I don't think they "want to believe" - I think it is more a case of "fearful lest HMRC's rules go further/catch more than it appears"?:eek:

If the "man in the street's" interpretation of the rules, or even a tax barrister's interpretation of the rules were cast iron in law, there would not be court cases arguing the toss?:)

Exactly, as we are doing here . This is why I was looking for clear evidence from HMRC that they approved this. Technically i still don't have that but am willing to believe based on the feedback so far.

What I don't get is, if we ignore the post with real life evidence that only surfaced more recently, how watertight are the interpretations of the rules by posters here? Does it mean there is no chance HMRC could successfully challenge these posters interpretation if they suddenly felt inclined to (ignoring the fact that they haven't shown any appetite to apply these rules to date and if HMRC hadn't accepted this as valid planning).

jamesd

RickyB2000 wrote: »

Now, if the seller was 55 and made a larger than normal contribution with the aim of getting an immediate tax free lump sum they could be looked at as recycling. Though it could also be normal pension planning. Thoughts?

I think that you should read or reread the discussion in parliament that I linked to earlier, which answers this question. It is normal retirement planning to increase pension contributions in anticipation of taking a bigger lump sum. In the opinion of the lawmakers involved in the discussion. And in the opinion of HMRC in the rules interpretation description:

"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 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."

I also think that you should read this discussion, which contains this from a person who contacted HMRC after being misled by about recycling:

"I was put through to a specialist with whom I had a long conversation and my deductions were:

We (HMRC) don't focus on recycling legislation. It was bought in by a government more to prevent the finance industry creating products to exploit a loop hole.
It would be up to us (HMRC) to prove you had recycled based on you meeting all 6 conditions stated on the HMRC website.
As your wife/partner works we would not question this within the limits allowed (£3600 or amount based on salary)."

Notice that I participated in that more recent one. Sadly note two pros getting things wrong in those discussions, one an actuary, the other an IFA.

RickyB2000 wrote: »

What if the buyer bought the house with a tax free lump sum, sold it a few months later and contributed to their pension scheme. I guess the £10k contribution limit would prevent recycling here as well

Potentially blocks it, though unless there has been previous taking of some money beyond the tax free lump sum the limit would still be 40k. In that case it would be quite hard for HMRC to successfully argue that the purpose was recycling, given the clear fact that the money was used to buy a property, a not inexpensive process. The reason for the sale might be investigated, if HMRC had concerns, but see earlier observations about this rule apparently never yet having been actively used by HMRC on an individual.

Consider another real life PAYE case:

1. A person increased monthly pension contributions via salary sacrifice at around the same time as they borrowed money on credit cards.
2. The person purchased Venture Capital Trusts roughly corresponding to the extra amount borrowed.

Was the purpose of borrowing to increase the pension contributions? Money is fungible to it could have been used. But the events make it pretty clear that it was borrowed for the VCT purpose, not the pension purpose. If HMRC was to ask the person has a really good reason to explain to HMRC. Even though money is fungible so it's actually moot which money was was doing what, since the borrowing made the money available for all purposes.

RickyB2000 wrote: »

But if a pension scheme feels it prudent to get a formal declaration of acceptance from HMRC, isn't it also prudent for the person who is going to make the contributions to be crystal clear on this point?

Note that they did get the intent right but what was the cost to them of just asking HMRC to confirm? Minimal to none and it protected their employer from the risk. That's part of their job even if they were sure in advance. And they could then also tell their customer that their customer also correctly understood the situation, part of their customer service.

RickyB2000 wrote: »

Are you saying the pension scheme will take the hit and I get off Scot free? Or will the scheme insist on knowing and checking the source of all contributions?]

You'd pay but the scheme could also have to pay. One reason why schemes ask about recycling is that the rules for the scheme sanction charge have more lenience for unknowing actions and asking may help them to argue on that point with HMRC.

jamesd

RickyB2000 wrote: »

What I don't get is, if we ignore the post with real life evidence that only surfaced more recently

We've been discussing this recycling here for a long time now. You just don't know the history while those disagreeing with you had the background of the previous discussions. Including lots of discussions where FUD was raised but turned out to be wrong.

RickyB2000 wrote: »

how watertight are the interpretations of the rules by posters here? Does it mean there is no chance HMRC could successfully challenge these posters interpretation if they suddenly felt inclined to (ignoring the fact that they haven't shown any appetite to apply these rules to date and if HMRC hadn't accepted this as valid planning).

There's always the chance that HMRC might question anything but it is possible to simply ask HMRC if desired.

For example, say a person has a defined benefit pension and is entitled to a tax free lump sum and decides to use the lump sum for pension contributions to a DC pension. Recycling in breach of the rules? Reaching NRA is something that just happened, the person was going to get the money anyway, so the question then is what to do with it. In this specific case I think it's fine to plan to recycle the money before reaching NRA because it's normal retirement planning. But this is one where I'd suggest a phone call to HMRC to ensure that they agree. Particularly if the scheme is one where the person gets to choose how much lump sum to take, not one where the amount is fixed by the scheme. Essentially in this case it's more like a windfall than deliberately engineering things. Even though the money will actually come from a lump sum.

Alternatively I might just suggest that the person wait until two tax years after the year of reaching NRA. But asking HMRC beats waiting and if they say they would consider it breached the rules the wait option is there to be used.

Knowing when to say ask HMRC is something that those who've been discussing this for a while or who do it as a job are more likely to get right, better understanding where the ambiguities are.

RickyB2000

Thanks Jamesd, more good posts! Hopefully I now have a much deeper understanding of the recycling rules. It is a shame there is no 'mainstream' article that explains this in a simple to understand manner. At least covering the possible scenarios you have described. But I guess it is not simple, and if it is not explicitly called out as allowed by HMRC I guess most wouldn't risk it.