Pension Winding up payment

MadMat

This morning I received a letter from a previous employers pension scheme informing me that the pension is being wound up.

I've been offered two options, I can either arrange a transfer to another pension, or I can take a cash winding up payment that will be 25% tax free, and the other 75% taxed as income.

Do pension recycling rules stop me from taking the cash and paying the whole lot into my SIPP? As I'd get more that way than by doing a direct transfer!

Mat

Charlton_Taz

Yes, can do that. My OH did the same thing a couple of years ago, and we did the same...took the cash, then paid it into his SIPP. Worked, no problem.

coyrls

You can only pay in an amount less than or equal to your earnings in the tax year and so that may limit the contribution that you can make.

PeacefulWaters

Would there be a £10k annual reinvestment limit in the circumstances described?

If so, it's likely transferring is better than withdrawing, depending upon the amounts and incomes involved.

MadMat

I have been given a valuation of approximately £7.5k and have the earnings to cover paying that amount into a pension. It's just I've seen mention on these boards rules about recycling the 25% tax free part into another pension and didn't understand them fully!!

Mat

kidmugsy

If the total is £7.5 k then the tax-free lump sum part is small enough that anti-recycling rules won't affect you.

MadMat

Excellent. So as long as taking it in cash doesn't bump me up to the 40% income tax bracket I get about £375 more that way than by doing a straight transfer.

Mat

jamesd

You're right that it's better to take the money and use it for more pension contributions.

Winding up lump sums are not affected by the tax free lump sum recycling rules if for no other reason that it wasn't pre-planned, since you couldn't control whether the scheme was to be wound up. Not that it matters anyway when the total is 7,500 since another recycling threshold that has to be exceeded is 7,500 of tax free lump sum. Since winding up lump sums are limited to a maximum of 18,000 total they are sure always to have a smaller tax free lump sum amount than that and while the limit is for rolling twelve month periods not per scheme you probably still didn't exceed that.

Winding up lump sums and small pot lump sums do not trigger the reduction in money purchase annual allowance from £40k to £10k a year that PeacefulWaters mentioned.

If it does take you into higher rate income tax just tell HMRC the gross amount with the basic rate tax relief added and they will adjust your tax code to give you the higher rate income tax relief.