Recycling problem

Mnd

Right, so if he pays in 20k ..this will need to bring the pot up to 92k..add in £4k tax relief to give total pot of 96k

Then they can take 24k tax free.

If this isnt the plan, then double check your plan

Durban

Thank you all for the very helpful replies.
It appears then that I may have misunderstood the recycling rules and that this ONLY occurs IF you put some of the money back into a pension which we wouldn’t do.

This is the bit that threw me from the HL website :

“You have been paying contributions of £5,000 a year into a pension. You then make a £100,000 contribution and afterwards take pension benefits, including £100,000 tax-free cash. However, as this contribution was pre-planned, it is a significant increase and represents more than 30% of the tax-free cash, it is caught by the recycling rule. It does not make a difference that the tax-free cash was paid after the contribution.“

In answer to the other questions , this is an old Aviva stakeholder pension and only the tax free amount will be taken, nothing else and yes the pension should be enough to be able to take the £24,000 tax free. Nothing else will be touched and if there wasn’t quite enough in there at the time, we would adjust the figure that we draw accordingly to keep within the 25% limit

So to clarify. We are still within the rules to pay in the lump sum, which will only be in order to receive the tax relief, draw immediately and as long as we don’t put it into another pension , will be able to do this ?

Thank you all again

chris1

No, as I understand it, it's the fact that you are taking a lump sum out of a pension which triggers the review of whether you have recycled or not. The order in which you do things is not important, neither is what you do with the money afterwards.

The checks shown on that HL sheet will still apply and you may be caught out. You will certainly be caught by 4 out of 5 of the checks, the remaining one depends on how much you have been paying in every year.

Mnd

Yes.. sorry to confuse the issue:T

GunJack

Would it work if you paid in the £20k over 2 or 3 tax years then? Or, live off the savings while upping "normal" pension contributions to compensate?

chris1

No, as I understand it they look backwards 2 years and forwards 2 years to check for that 'significant increase'. And it's cumulative!

AlanP_2

Take a look here for a pretty good explanation https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

Technically, I think you would fail at least one of those tests, but in practice I suspect not - particularly if you spread the contributions over a number of tax years.

Also, what is the 20k relative to his overall pension contributions?

Of he was paying say £1k a year in and suddenly upped it to £20k is different to £10k being upped to £20k even.

GunJack

The flowchart and explanation in that link all seem to revolve around either upping future contributions to a scheme or replacing savings used to do so, so if the tfls is used for neither and then contributions either cease or return to normal levels it suggests it's not recycling...why's it sooo complex??

Albermarle

I would be putting in £20,000, gaining £4000 in tax relief

Just to be a bit pedantic in a wider discussion, if you add £20 K to a pension you get £5K in tax relief.

Mnd

AlanP wrote: »

Take a look here for a pretty good explanation https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

Technically, I think you would fail at least one of those tests, but in practice I suspect not - particularly if you spread the contributions over a number of tax
/QUOTE]

That's not a problem though, I think all the tests must be failed to qualify as recycling