Recycling Pension ?

Lancelot6

Hello,

I would appreciate any help or suggestions anyone can offer me.

I like a lot of other people am very confused by the re-cycling rules on pensions. Everything I read appears to refer to Defined Contribution (DC) pensions, and there does not seem to be anything referring to Defined Benefit (DB) pensions.

I am 55 and have a private employer based DB pension which I would like to take as soon as I can clarify the rules. At 55 the pension gives a tax free lump sum of £120,000 and a reduced pension of £18,000 p.a.

If I take the pension, and continue working as I intend to do with my current salary of approx. £40,000 I will clearly end up paying higher tax rate, since my combined earnings will be £40,000 + £18,000 = £58,000 p.a

If I leave the lump sum in a bank, or invest it elsewhere, not in a pension, can I join a SIPP and pay £30,000 p.a. into the SIPP from my salary (includes employer contributions, and current AVC contributions) to avoid the 40% tax which I would otherwise pay?
My understanding is:-

1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?

2. I can also do this because I am not exceeding 100% of my employment earnings of £40,000.

3. There will be no reduction in my yearly allowance of £40,000 because I am taking the pension from a DB pension scheme, and not a DC scheme.

4. After about 1 – 5 years, when I have had enough of work, I will be able to take another 25% lump sum from the SIPP, and draw down the remainder whenever I need it.

I am nowhere near the lifetime allowance of £1,000,000 I really just want to know if I can do it legally, and if I am missing anything obvious.

I have done the maths, and providing the government do not change any rules (yes, I know they may well do, and have been thinking about it) then the maths far and away says that leaving the DB and joining the SIPP is the best thing to do.

Thanks for your help,

Lancelot6

jamesd

Your plan seems fine. I summarise the recycling rules here. Using income for contributions while not living on the lump sum is fine and that's what you seem to be doing, along with just normal retirement planning.

If your work pension isn't salary sacrifice tell HMRC about your intended level of pension contributions for the year and they will adjust your tax code to try to give you the correct amount of 40% relief throughout the year.

You can take £7,500 per rolling twelve month period within the recycling rules and it might be best to try to do this as well to try too keep down the potential for exceeding the lifetime allowance. Since you can prove no recycling you could take the whole 25% instead.

I suggest making pension contributions of your whole pay since you can afford it and it'll provide you with a tax gain, effectively making £40k of your income a quarter tax free on top of your personal allowance. For the remainder of your tax bill you might consider a little VCT buying. Plenty of capital for this so provided the investments are suitable there's no need to pay income tax at all.

TcpnT

Jamesd, Are you sure about this ? My reading of the OP's suggestion - see paragraph below:

1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?

Is that he is not suggesting a DB transfer but is planning to start drawing the DB pension at 55 and taking the associated lump sum.

Surely in this case with an income being taken from the DB pension the Money Purchase Annual Allowance will be applicable and he will be restricted to £10,000 (Possibly soon £4000) gross annual contributions to a SIPP or other pension - so that suggested plan will not be possible.

Maybe be my understanding is incorrect but I'm pretty sure on this one.

xylophone

Surely in this case with an income being taken from the DB pension the Money Purchase Annual Allowance will be applicable and he will be restricted to £10,000

No.

http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/


Accessing benefits non flexibly

As long as the flexible access detailed above is avoided then a member will not trigger the MPAA. Examples of this are taking a scheme pension from a defined benefits arrangement or taking a non-flexible annuity.

Lancelot6

Thank you all for your replies.

It sounds as if I will be able to carry this out. Though the second post does demonstrate the confusion between the rules when applied to DB or DC (and the flexible aspect of DC Pensions).

Jamesd, the scheme is indeed a salary sacrifice system, but I still expected to be taxed and have to claim it back at the end of the year. Indeed this was one aspect of the idea that I am still trying to deal with since I was thinking that I would have to "borrow" from other investments, to "repay" myself the temporarily loss of 40% tax from the £18,000 pension. In other words, I assumed I would have to find the 40% tax for the first year since I would only get it back in time for the second year, if that makes sense.

You are saying that this will not be the case because it is a salary sacrifice scheme, and that it should be adjusted "in real time"? Or that if I let the HMRC know before I start to do this, that I will not lose the tax in "real time" either? That is really helpful since I have some long standing investments including PEPS (whatever happened to them, do they still count tax free? I hope so.) and ISAS and unit trusts, which are also a part of my retirement plans, and which I would rather not have to break into just now if I do not need to.

My other main problem is where to put the lump sum in order to get an ok'ish return. I am not looking forward to that problem. My wife doesn't want me to take risks, but I know that that is the way to grow it. The obvious thing to do is to squirrel it away in lots of little investments to reduce risk, but that doesn't really help to demonstrate that I am not using it to fund pension contributions.

Lancelot6

xylophone

My other main problem is where to put the lump sum

Are you compelled to take the lump sum?

TcpnT

Jamesd, Are you sure about this ? My reading of the OP's suggestion - see paragraph below:

“
1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?
”Is that he is not suggesting a DB transfer but is planning to start drawing the DB pension at 55 and taking the associated lump sum.

Surely in this case with an income being taken from the DB pension the Money Purchase Annual Allowance will be applicable and he will be restricted to £10,000 (Possibly soon £4000) gross annual contributions to a SIPP or other pension - so that suggested plan will not be possible.

Maybe be my understanding is incorrect but I'm pretty sure on this one.

My apologies for confusing the matter. I was wrong and other replies here are correct

Lancelot6

Are you compelled to take the lump sum

No, I can buy an annuity or transfer it out.

xylophone

You can't simply take a higher scheme pension?

Lancelot6

You can't simply take a higher scheme pension?

Yes, I can take any percentage of lump sum from 0 - 25% The pension would go from around £18,500 to £19,700 which is my maximum taking it at at 55 years. So I would be buying an extra £1,200 p.a. pension. I have no idea how I could calculate how much to reduce my lump sum percentage by in order to do this. However, it looks like it would cost me around £20,000 from my lump sum to do it, since adding £25,000 by AVC (if I was able to do that in one go) would increase my lump sum from £124,000 to £130,000 and my pension to £19,500.

Is it worth paying £20,000 to receive an extra £1000 pension. I guess that is the question. It would take 20 years to get it back even without taking any investment increase of the £20,000. Also the extra pension is subject to tax when I do stop paying into any SIPP I open.

jamesd

TcpnT wrote: »

Jamesd, Are you sure about this ? ... Maybe be my understanding is incorrect but I'm pretty sure on this one.

Please don't let this discourage you from speaking up in the future when you think I've made a mistake. I do sometimes and being told about them beats the alternative!