Pension recycling

wats0062

Having taken my company pension recently I find myself with a possible dilemma.
My company FS pension scheme closed and the company opened a new pension scheme. I have now put my FS scheme into payment and agreed to work for 2 more years.
So I have a TFLS, my salary and my monthly pension payment. Salary and pension put me well over the 40% tax bracket. I was hoping to pay all the amount over 40% straight from my salary into the new pension scheme via smart pensions. This leaves me what's left of my salary and my pension to live on.
The TFLS has gone on a property, premium bonds and saving account.
However I have been made aware of "Recycling" and potentially falling into a tax trap. Does "Recycling" only refer to the TFLS? (which is not funding my new pension in any way).
I did call HMRC yesterday but they wouldn't confirm and gave me the number for the pensions regulator to call. I ran out of time yesterday and they are closed today.
Opinions very much appreciated, thanks.

Albermarle

It does not matter if it is not literally the TFLS which is used to increase pension contributions . The fact you have received a TFLS and then significantly increased your contributions is enough to be potentially classed as recycling..
There are 6 rules and all 6 have to be valid for it to be called recycling :
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

The reason there are rules is that the pension tax relief system in UK is generous so taking out TFLS and then getting further tax relief on it is seen as an abuse of the system.

xylophone

The rules are here

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

You have a pension in payment. You have taken and used a PCLS. You are not proposing to recycle the PCLS.

You have a salary. This is relevant earnings for pension purposes and therefore you could contribute to a pension and benefit from tax relief in the normal way depending on how this is managed by your payroll (relief at source/ net pay) and on annual allowance/lifetime allowance rules.

Is the proposal for your employer to make all contributions to the new DC pension scheme under a salary sacrifice arrangement?

You will agree to sacrifice an amount of salary that means that with all income taken into consideration, you will pay tax at only 20%?

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/salary-sacrifice-facts/

wats0062

Albermarle wrote: »

It does not matter if it is not literally the TFLS which is used to increase pension contributions . The fact you have received a TFLS and then significantly increased your contributions is enough to be potentially classed as recycling..
There are 6 rules and all 6 have to be valid for it to be called recycling :
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

The reason there are rules is that the pension tax relief system in UK is generous so taking out TFLS and then getting further tax relief on it is seen as an abuse of the system.

This is the bit that bothers me, although the TFLS can be audited to see it is used for other purposes.
My combined salary and pension amounts to about £80k, so more than enough to fund my pension contributions.
I suppose it is going to look suspicious that my contributions raise from 10% to 65% of my salary at the same time I got my TFLS but in reality it has no bearing on my contributions, I will still be left with a combined salary and pension of over £40k to live on.

wats0062

xylophone wrote: »

The rules are here

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

You have a pension in payment. You have taken and used a PCLS. You are not proposing to recycle the PCLS.
Correct,
You have a salary. This is relevant earnings for pension purposes and therefore you could contribute to a pension and benefit from tax relief in the normal way depending on how this is managed by your payroll (relief at source/ net pay) and on annual allowance/lifetime allowance rules.
This is how I see it.
Is the proposal for your employer to make all contributions to the new DC pension scheme under a salary sacrifice arrangement?
Yes
You will agree to sacrifice an amount of salary that means that with all income taken into consideration, you will pay tax at only 20%?
That's my aim, yes
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/salary-sacrifice-facts/

Thanks.:):)

nigelbb

You should be reassured by the fact that while illegitimate pension recycling is theoretically liable to be penalised that as far as is known HMRC have never sanctioned anyone for pension recycling. As long as you have the salary to sustain the contributions to the pension I cannot see it ever being regarded as pension recycling.

Albermarle

I suppose it is going to look suspicious that my contributions raise from 10% to 65% of my salary at the same time I got my TFLS

If they ever investigated then this would be the obvious thing that they would focus on .
However as noted already it is highly unlikely that anything will happen . Plus you could probably make a case that it was not intentional /planned.

crv1963

wats0062 wrote: »

This is the bit that bothers me, although the TFLS can be audited to see it is used for other purposes.
My combined salary and pension amounts to about £80k, so more than enough to fund my pension contributions.
I suppose it is going to look suspicious that my contributions raise from 10% to 65% of my salary at the same time I got my TFLS but in reality it has no bearing on my contributions, I will still be left with a combined salary and pension of over £40k to live on.

I'm pleased that you raised this thread, I was going to start something similar, although my figures are slightly lower at a forecast £60-65k combined wage and DB pension, with a planned salary sacrifice of £24k pa so all from earnings to a DC pension.

A friend does something similar and can clearly show DC contributions clearly from income and tells me that no one from HMRC has questioned it.

Alice_Holt

Bear in mind that not all income is deemed relevant income for the purpose of receiving pension tax relief.

Income from your pension is not classed as relevant income, this may change your calculations somewhat.
https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

jamesd

wats0062 wrote: »

My company FS pension scheme closed and the company opened a new pension scheme. I have now put my FS scheme into payment ... So I have a TFLS, my salary and my monthly pension payment. Salary and pension put me well over the 40% tax bracket. I was hoping to pay all the amount over 40% straight from my salary into the new pension scheme via smart pensions. ... The TFLS has gone on a property, premium bonds and saving account. ... However I have been made aware of "Recycling" and potentially falling into a tax trap. Does "Recycling" only refer to the TFLS? (which is not funding my new pension in any way).

I describe the recycling limits from a what you can do end here.

The recycling limits only apply to a PCLS. They do not apply too pension income or other types of pension lump sum.

So, 1. you are completely free to increase your gross pension contributions by your gross pension income. This will be your new level of expected contributions for the five year rule calculations.

2. Even if you had pre-planned to recycle the PCLS you're allowed to increase contributions above the expected level by 30% of the PCLS over the two tax years before taking it, the year you take it and the following two years. You can further increase this by taking PCLS money from other pensions, including the DC pot you'll be contributing to.

Since you're using salary sacrifice as a higher rate tax payer the optimal contributing approach is enough to get full employer match every month then sacrifice down to minimum wage for the smallest possible number of months to get the rest done. NI is calculated for each pay period, not annually, so this maximises the amount on which you save 12% employee NI instead of 2%.

I suggest that you sacrifice as much as you can. You get the NI saving and looked at another way 25% of the sacrificed pay becomes free of income tax.

Even better if you can withdraw 25% of the new money, perhaps after a transfer, or have other DC to use, because that further increases the limit.

In addition, from DC, you can use the small pots rule three times per lifetime to take all of a pot worth up to 10k. You can create those with transfers. This can be used to add another 30k of contributions on which you can save 12% employee NI and 25% of the income tax. This isn't PCLS money so you can use it all to increase contributions.

If you have a spouse they can give - not lend - you money to allow more.

You're potentially restricted by the 40k annual allowance but probably have enough carry-forward available from the last three years.

How does your lifetime allowance situation look?

jamesd

crv1963 wrote: »

A friend does something similar and can clearly show DC contributions clearly from income and tells me that no one from HMRC has questioned it.

HMRC have made it clear that they aren't interested in individuals, it's really aimed at blocking organised schemes. The annual and lifetime allowances now curtail the possible benefit.

HMRC might take an interest if they were carrying out a tax investigation for some other reason, though.