Is this recycling?

concernedpharmacist

In May 2022, I will receive my NHS defined benefit pension (£20k) with a lump sum of £60k.
In October 18 an endowment policy of mine matured with 50k.  But instead  of paying off my £40k interest only mortgage, I used the endowment for some house improvements (£25k) and increased my DC pension contributions by £15k p.a. to about £20k p.a.
 I have been drawing gradually on the remaining £25k of my endowment to make up for the reduction in my take home income.
When my DB pension comes through intention is to further increase my current DC pension contributions up to £40k p.a. And at some point use part of my DB lump sum to pay off my mortgage.
As money goes round would this in anyway be considered as recycling the lump sum?
I am not intending to use the lump sum directly to pay into my pension, but I could not have afforded to maintain my current pension contributions without deferring paying off the mortgage.

Albermarle

When you take your NHS pension , will you actually stop working ?
Apart from possible recycling issue , you will have to be earning enough to put large sums in your pension and still get tax relief .

concernedpharmacist

Albermarle said:

When you take your NHS pension , will you actually stop working ?
Apart from possible recycling issue , you will have to be earning enough to put large sums in your pension and still get tax relief.

  No I intend to continue working for 1 or 2 years.  Increasing my salary sacrifice DC pension contributions to £40k when my NHS pension comes.
  My taxable income from employment during those 1-2 years will be under £30k, which with the £20k NHS pension will give gross taxable income under £50k. 

drumtochty

You can only pay taxable income into a pension. You advise that as £30k. The £20k income from the NHS pension is termed unearned income. It is still taxable but not available to pay into a pension and get tax relief.

.

Albermarle

So if your salary is say £25K , then the max you could contribute to a SIPP would be £20K ( and £5K tax relief would be added to it ) 
As this is approx. what you are dong already there will be no recycling issue anyway .

concernedpharmacist

drumtochty said:

You can only pay taxable income into a pension. You advise that as £30k. The £20k income from the NHS pension is termed unearned income. It is still taxable but not available to pay into a pension and get tax relief.

.

   My taxable income AFTER sacrificing up to £40k will be around £30k.  My plan was to increase my contributions from a current approx £20k (since Oct 18)  to about £40k when the NHS pension comes in (May 2022). My understanding is that there is a maximum pension contribution limit of £40k (including employer's contributions). As I am accessing a DB pension I believe the £40k DC contribution annual allowance will remain.

 I would not be directly paying the NHS pension into the pension, but I would use the NHS pension to cover my reduction in salary after I increase the contribution. My understanding that there is no issue with using my DB pension in this way.

I am just unsure whether using my lump sum to pay off my mortgage may be considered recycling. As I could not afford to pay off my mortgage at the same time  as increasing contributions without accessing the lump sum.

concernedpharmacist

Albermarle said:

So if your salary is say £25K , then the max you could contribute to a SIPP would be £20K ( and £5K tax relief would be added to it ) 
As this is approx. what you are dong already there will be no recycling issue anyway .

  My gross salary is currently about £60k, but I am already contributing £20k by salary sacrifice to my DC pension. I intend to increase this contribution to £40k (allowing for employers contributions) when my DB pension comes in.  My taxable income - salary plus DB pension will therefore remain well below £50k in total.
  I don't want to contribute to a SIPP but just to increase the salary sacrifice to my workplace pension for the last couple of years of employment before retiring.

crv1963

concernedpharmacist said:

Albermarle said:

So if your salary is say £25K , then the max you could contribute to a SIPP would be £20K ( and £5K tax relief would be added to it ) 
As this is approx. what you are dong already there will be no recycling issue anyway .

  My gross salary is currently about £60k, but I am already contributing £20k by salary sacrifice to my DC pension. I intend to increase this contribution to £40k (allowing for employers contributions) when my DB pension comes in.  My taxable income - salary plus DB pension will therefore remain well below £50k in total.
  I don't want to contribute to a SIPP but just to increase the salary sacrifice to my workplace pension for the last couple of years of employment before retiring.

Are you still directly employed by NHS? If so that might torpedo your idea. 

There is no reason why you cannot take NHS Pension, then work in your area of expertise, use NHS Pension for living expenses and salary sacrifice 40k of your salary into a DC pension. You can spend the NHS TFLS any way you wish, including paying off the mortgage.

So if I have the figures correctly- 20k NHS Pension + 60k earnings= 80 k total money coming in, salary sacrifice 40k so total earnings for tax purposes is 40k so within the 20% tax bracket?

concernedpharmacist

crv1963 said:

concernedpharmacist said:

Albermarle said:

So if your salary is say £25K , then the max you could contribute to a SIPP would be £20K ( and £5K tax relief would be added to it ) 
As this is approx. what you are dong already there will be no recycling issue anyway .

  My gross salary is currently about £60k, but I am already contributing £20k by salary sacrifice to my DC pension. I intend to increase this contribution to £40k (allowing for employers contributions) when my DB pension comes in.  My taxable income - salary plus DB pension will therefore remain well below £50k in total.
  I don't want to contribute to a SIPP but just to increase the salary sacrifice to my workplace pension for the last couple of years of employment before retiring.

Are you still directly employed by NHS? If so that might torpedo your idea. 

There is no reason why you cannot take NHS Pension, then work in your area of expertise, use NHS Pension for living expenses and salary sacrifice 40k of your salary into a DC pension. You can spend the NHS TFLS any way you wish, including paying off the mortgage.

So if I have the figures correctly- 20k NHS Pension + 60k earnings= 80 k total money coming in, salary sacrifice 40k so total earnings for tax purposes is 40k so within the 20% tax bracket?

No,  I am no longer employed by NHS.  Private employment now, that's why I now have a workplace DC pension now.

Your figures are correct.
But it had been suggested that using the TFLS in any way that allowed me to boost pension payments was recycling. Indirectly, by increasing my contributions in 2018, using my endowment to support my income since then, and then using the TFLS to pay off the mortgage this might be considered recycling the lump sum. That was my concern.

drumtochty

Yes, there were worked examples in the HMRC manual to their staff around 2008, that did infer that if you were using a pension commencement lump sum or otther cash indirectly to cover personal costs in order to artificially increase your pension contributions by a large extent, this could be classed as recycling. I think they were saying by 30% but not exactly sure about that

Now there are those on this forum who claim that HMRC have not gone after people for that and HMRC are unlikely to do that.

I do not know if that guidance is still in the HMRC manual.

concernedpharmacist

drumtochty said:

Yes, there were worked examples in the HMRC manual to their staff around 2008, that did infer that if you were using a pension commencement lump sum or otther cash indirectly to cover personal costs in order to artificially increase your pension contributions by a large extent, this could be classed as recycling. I think they were saying by 30% but not exactly sure about that

Now there are those on this forum who claim that HMRC have not gone after people for that and HMRC are unlikely to do that.

I do not know if that guidance is still in the HMRC manual.

Thanks. 
I believe that they look at increases in the two tax years before the pcls. I made the last increase in 2018/19, but won't get the DB lump sum till 2022/23. So hopefully that increase is outside the window. 
In 2022 I intend to increase my contributions again (by more than 30%), but I will then be in receipt of my DB pension so will not be using the PCLS to fund this in any way.
It isn't my intention to recycle but I wondered if inadvertently I had created a problem by relying on my PCLS to pay off my mortgage.