Recycling problem

Shedman

Just purely out of curiousity, as recycling seems to crop up every so often as a topic on this forum and seems to be something that elicits mixed responses, is anybody aware whether an individual has ever actually been assessed and penalised under the recycling rules anyway?

In a thread a couple of years ago I seem to recall that one of the regulars (might have been Jamesd who seemed to be knowledgable on this issue) indicated that no one had been to date and that the thrust of the recycling rules were intended to prevent such schemes being marketed by financial services companies etc rather than targeting individuals.

AnotherJoe

Jeez talk about making it complicated
Of course you can raise your pension contributions without penalty.
Recycling only comes into it if you take money out of a pension and put it back in. Hence the term.
You are not doing this.
So there is no recycling.
It's that simple.

Durban

chris1 wrote: »

It doesn't matter what the lump sum is used for, it's the fact that it's taken which triggers the 5 tests.

This is how I understood it.


Thanks AnotherJoe.

Linton

AnotherJoe wrote: »

Jeez talk about making it complicated
Of course you can raise your pension contributions without penalty.
Recycling only comes into it if you take money out of a pension and put it back in. Hence the term.
You are not doing this.
So there is no recycling.
It's that simple.

I dont think it is necessarily that simple. It does not matter in which order events happen. I did read about one example which was deemed to be recycling - you borrow money to put a lump sum into a pension. You then withdraw the money taking the TFLS, pay back the loan and trouser the extra tax relief. The OPs situation is a bit different as each transaction could be justified on its own merits whereas in the loan case the only justification was tax avoidance.



I suspect the exact bounds of recycling will be undefined until a case is taken to the courts. Any volunteers?

AnotherJoe

But the OP is not borrowing money ! Why raise all sorts of hypothetical cases in this thread that do not apply to them?
All they are doing is what many people do near retirement which is increase their pension contributions. There are no rules on that other than the normal, eg £40k / max salary etc etc.
People are coming up with all these obscure efodge cases when the fact is there's no recycling here. They are not proposing to up their pension contributions later (and even if they did up to £7500 is allowed)
This has got silly, OP asks a simple question with a simple answer and gets the kitchen sink of obscure hypothetical situations thrown at them.

TriathNanEilean

Durban wrote: »

Also , I am confused. If I add 20 percent to £20, 000 , I would have thought that would make it £24,000. It has been mentioned that it would be £25,000. How is this please ?

At least this one is easy (especially since I remember getting thrown by it too when I first started).


Say I have £25,000 of taxable income. I pay £5,000 tax, leaving £20,000. When I put that amount into a pension, the tax relief of £5,000 gets added in to put me back to where I was.


Or think of it as 20% taxed, leaving 80%. When I get tax relief on that it turns out to be a quarter of my 80%.

Linton

AnotherJoe wrote: »

But the OP is not borrowing money ! Why raise all sorts of hypothetical cases in this thread that do not apply to them?
All they are doing is what many people do near retirement which is increase their pension contributions. There are no rules on that other than the normal, eg £40k / max salary etc etc.
People are coming up with all these obscure efodge cases when the fact is there's no recycling here. They are not proposing to up their pension contributions later (and even if they did up to £7500 is allowed)
This has got silly, OP asks a simple question with a simple answer and gets the kitchen sink of obscure hypothetical situations thrown at them.

Recycling is more subtle than it first appears. My point was that In this case the OP could be seen as indirectly financing the £20K pension contribution from the future £25K TFLS as the mortgage would need to be paid for anyway. The fact that the TFLS was in the future does not of itself rule out recycling.

The HMRC tax manual, https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810does, states.....

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.

Note the “unless”. So it seems to me that the situation is open to argument, to which neither I nor most of the people on the forum can provide a definitive statement. The problem is not the extra TFLS being generated but rather the whole of the £20K.

AnotherJoe

Again, they are not looking, even indirectly to recycle.
The PCLS is NOT being used, even indirectly, to recycle.

Pension mortgages would have been banned years back if this approach was not allowed.
OP starts out by saying they've been saving for years.
Well, now that money is going into a pension. Its no different to had they put it into a pension as they went along.
Using the words you posted, they are not "using that pension commencement lump sum as the means of making those increased contributions,whether in a direct or indirect way."
OP ignore the fear mongers and get on with it.

chris1

Linton wrote: »

I dont think it is necessarily that simple. It does not matter in which order events happen.

Linton wrote: »

Recycling is more subtle than it first appears... The fact that the TFLS was in the future does not of itself rule out recycling.

Linton is right, it does not matter whether the OP makes the extra contribution then takes it out or the other way round, it is still subject to the recycling tests.

Taking a tax free lump sum triggers the tests, which takes into account contributions 2 years before and 2 years after.

HMRC's site has examples as well as the full rules, as do Royal London, Prudential and HL.

System

Linton wrote: »

The fact that the TFLS was in the future does not of itself rule out recycling.

.

It's exactly like real recycling.
We dump all the waste in the sea today, and then tomorrow we think of a way of recycling it.