Recycling Pension?

Malchester

Hi. I wonder if anyone can clarify something for me. I have a deferred LGPS Pension (West Yorkshire) and am one of the privileged few who take full pension at the age of 60 (next year). I also have another deferred DB Pension and a live DC pension through my current employer. I know there are rules about recycling pension but when I receive the lump sum next year from my LGPS pension is it possible / legal to put it into my DC pension. If I can do this can I claim tax relief on it? Thanks for your help in advance

Linton

Suggest you have a look at http://www.pruadviser.co.uk/content/knowledge/technical-centre/pension-recycling/. Gunther's case seems similar to your's.

Note that to get tax relief your gross pension contribution in a year is limited to your "earned income" and pension income isnt "earned".

Malchester

Thanks. In that case I could add the right amount each year for two or three years to make sure that I do not go above my annual earned income. If I am not a taxpayer could I still claim tax relief on the contribution?

Linton

You could pay the extra pension contributions over several years if you have the earned income to cover the gross payments. You can still pay in a maximum of £2880 net, £3600 gross if you dont have the income. You will get tax relief even if you dont pay tax. The amount you pay in must be 80% of the gross contribution you want to make. The missing 20% is the tax relief automatically paid by HMRC directly into your pension. You dont need to claim it.

Note that simply adding the payment to your contribution to your currrent employer's pension may not give the desired results if the scheme has "relief at source", which most other than perhaps the very smallest schemes normally do. The money would have to be paid in directly by you to get relief from tax you didnt actually pay. So you may need to set up a private pension.

Malchester

Thanks Linton for your helpful comments. I will check with the pension firm used by my company (TPT / Benpal) whether I can add directly into the scheme on a personal basis. The rules over recycling pension seem to me to be very complicated / confusing even for someone who is quite savvy with financial matters.

So just to clear it in my mind - are you suggesting that if a lump sum from a defined benefit pension used (within the limits of maximum contributions etc) to fund a defined contribution pension, maybe over two or three years, is not classed as pension recycling - sorry if that comes across as being a bit thick!

Linton

The rules are complex and ill defined. It seems that tax rules often are in order to give HMRC the leeway they need to prevent flagrant but "clever" attempts to avoid the intent of an ill defined law. When a particular case is disputed HMRC and the tax payer can go to court and the judge will give a definitive ruling on those circumstances. From then on everyone knows where they stand.

Having chased down my link and links referenced there it seems to me that just as with "Gunther" your proposals clearly meet all the conditions required to be considered recycling except for the condition that the the transaction must be "pre-planned".

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133820 helpfully says:

Remember that one of the conditions for the recycling rule to apply is that the recycling must be pre-planned - the individual must have intended from the outset to take a pension commencement lump sum to enable significantly greater contributions to be paid into a registered pension scheme by or in respect of that individual.

Presumably you didnt claim the Lump Sum for the purpose of recycling, you would have received it anyway but later thought it could be usefully paid into your pension. So you would seem to be safe.

I am not a lawyer. Should HMRC object, perhaps your case may lead to the courts making a definitive ruling on the subject to the benefit of all!

Malchester

Thanks again Linton. You are right in saying that it is not pre-planned. I have no choice but to take the lump sum (and annual pension) when I am 60. I have checked with my LGPS (WYPF) who have said that I receive full deferred pension at 60. Even if I could, there would be no point in delaying as I would lose out significantly by doing so. The lump sum is a fact over which I have no control. I will see what the pension company say about adding to my existing pension directly and take it from there. Thanks again for you really very helpful responses