Recycling problem

Durban

In approximately 2 years myself and my husband would have saved about £20,000 in order to pay the balance which will be owing on the mortgage at that time.
He will be 57 and I will be 54.


The money will have been built up over these 2 years using a mixture of regular savings accounts , work save scheme and peer to peer accounts. This would enable us to pay off our mortgage early.


The plan was to put this £20,000 into my husbands DC pension, gain the 20 percent tax relief and then draw £24,000 and pay off the mortgage, leaving the rest of the pension untouched, after just taking the 25 percent tax free lump sum. This would have enabled us to pay the mortgage off even earlier.


I now believe that we cannot do this because of the recycling rules. Is there any way we might be able to get around this somehow. I do not have a DC pension. I pay into the LGPS plus AVC's.


Many thanks

greatkingrat

Recycling rules say you can't take a tax free lump sum and put it back into another pension. However that isn't what you want to do. You are fine to use the lump sum to pay off the mortgage, or buy a sports car, or anything else you wish.

Durban

Thank you.

How I understand it, is that you cannot put more than 30% of what you normally pay into your pension as a lump sum in order to withdraw it shortly afterwards.

I would be putting in £20,000, gaining £4000 in tax relief and then withdrawing £24000. As I understand it, HMRC don’t allow this and it comes under the recycling rules. It doesn’t matter what you use the money for.

Mnd

It's only recycling if you pay it back into the pension, and then you can take 7500 tax free in any 12 month period, so you could do what you want BUT.. If you take any more than the tax free money ( your original deposit ) you will be restricted to payments in in the future. This is the money purchase annual allowance ( I think) normally shortened to MPAA. It restricts you to £4k PA

That's the problem with your plan, so you may be happy with this

Linton

Recycling means using the tax free lump sum to make an extra pension contribution and so getting further tax relief on money which has already gained from tax relief. Since you are not using the TFLS for this purpose you are not recycling.

Since you do not plan to take any taxable money from the pension there will be no reduction in your annual contribution allowance.

So there are no gotchas with your plan. Whether paying off your mortgage early is an optimal use of your money may be open to question.

Additional thought....Is this an employers pension? If so have you checked that the scheme rules permit taking money without leaving the scheme?

AnotherJoe

Just another "vote" to say you have completely misunderstood what recycling is.
You arent putting anything back into the pension after taking some out, so no recycling is involved.
In effect you've reinvented the "Pension Mortgage" of the 1980's. All perfectly above board.
Panic over, carry on as you were.

Mnd

Just to clarify Linton, I read that they want to contribute £20k..to get tax added of £4k then take out all of the £24k so they will get 6k tax free, 18k will be taxable and they will invoke the MPAA.

What we don't know if if there is enough already in the pot to take out 24000 tax free.

Sorry if I'm confused

System

Mnd wrote: »

What we don't know if if there is enough already in the pot to take out 24000 tax free.

Why does that matter? He's paying in 20, HMRC are adding 4, then he's taking out 24.


To repeat what everyone has said - the £20,000 is NOT coming from a pension, so it is NOT recycling.

Linton

Mnd wrote: »

Just to clarify Linton, I read that they want to contribute £20k..to get tax added of £4k then take out all of the £24k so they will get 6k tax free, 18k will be taxable and they will invoke the MPAA.

What we don't know if if there is enough already in the pot to take out 24000 tax free.

Sorry if I'm confused

Ah good point. I had read that the £24K was 25% of the total pot so would be totally tax free. Reading the OP again I still think that seems to be the case although its not absolutely clear. Durban needs to confirm. If your interpretation is correct I would agree with your conclusions. But, although it causes the MPAA reduction, it's not "recycling".

GunJack

Would hubby's salary minus current pension conts. allow for paying in £20k? Is carry-over needed? I think what MND is referring to isn't the recycling part of the question, but wll the total value of the DC pension be big enough to allow for a TFLS of "24k to be taken out, i.e. wll the total DC fund be >£100k?

GunJack

Durban wrote: »

The plan was to put this £20,000 into my husbands DC pension, gain the 20 percent tax relief and then draw £24,000 and pay off the mortgage, leaving the rest of the pension untouched, after just taking the 25 percent tax free lump sum. This would have enabled us to pay the mortgage off even earlier.

from the OP....the £24k would be at or under the 25% tax-free of the whole DC pot.