Lump sum recycling advice please

0779mike

I am a UK resident, aged 66 and not yet taking the state pension.
Current taxable Income
I expect to receive a taxable income from employment of approx. £60k this financial year ending 5 April 2020.

Also, this financial year I will have received approx. £26,931 from two DB pensions from previous employers.  One of those has been paying up to £8758 for more than 5 years. The other commenced in May this year and in July I received the related, tax-free PCLS of £131,665.

So, my total taxable income this FY will be approx. £87,146.

DC Pensions
I have £23,015 in a DC scheme with my current employer with ongoing employee deductions from salary before tax, and employer contributions totalling £736.31 per month.
I have £34,041 in a flexi-drawdown SIPP.
My plan is to make an Additional Personal Contribution of £39,490 ( < 30% of £131,665) into the current DC scheme before 5 April 2020.  The administrator of the scheme (Std Life) will add 25% to my contribution. 
When I leave my current employment I will transfer the DC fund into my SIPP and take the tax free PCLS of 25%.
I will then draw as much taxable income from the SIPP as I can each year, to stay below the 40% tax band.
My expectation is that the APC will save me a significant amount of tax and will not be deemed to be "Lump Sum Recycling" as it is less that 30% of the £131,665 PCLS that I received a month ago.
BUT, some have suggested that I need to be careful of the 25% added on by the DC administrator.
Is £39,490 the correct amount to maximise tax avoidance and avoid Pension Lump Sum Recycling charges ?

Any help most welcome,  Mike

Dazed_and_C0nfused

As this is a relief at source contribution the gross amount will be £49,362.

This will increase your basic rate tax band from £37,500 to £86,862. 

But you are probably only going to pay higher rate tax on an absolute maximum of £74,646.

So is your aim to get the maximumt tax relief possible.  Or the maximum higher rate tax relief.  Or put as much as possible info your pension fund?

0779mike

I want to pay as little tax as possible.
It may not be important but I may get made redundant in approx 4 months and probably won't take any further paid employment, if not I will retire at  the end of December.

Dazed_and_C0nfused

0779mike said:

I want to pay as little tax as possible.
It may not be important but I may get made redundant in approx 4 months and probably won't take any further paid employment, if not I will retire at  the end of December.

Part of your contribution isn't going to reduce your personal tax liability.  

If that is your aim where did you get the £39,490 (net) figure from?

Linton

Does "pension recycling" apply to the tax free lump sum from a DB pension anyway?  One of the requirements for recycling is that HMRC must be able to prove it was pre-planned - eg you took the lump sum for the purpose of recycling.  WIth a DB pension you have to take the lump sum when you start receiving the pension and you may have to take the pension at the specificed age, so it is difficult to see how pre-planning could be demonstrated.

0779mike

One of the tests for Lump Sum Recycling is that it must be more than 30% of the tax -free lump sum taken.  30% of my lump sum of £133,655 is £39,499.95 so I was planning an a figure just below that of £39,490 for my APC.  I will get 25% of the APC back as tax-free and I will drawdown the rest when I can to stay within my 20% tax band.

I just checked and my actual total salary this FY will be £59,217, so with the pensions payments received that will be a total taxable income this FY of £86148.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

Dazed_and_C0nfused

0779mike said:

One of the tests for Lump Sum Recycling is that it must be more than 30% of the tax -free lump sum taken.  30% of my lump sum of £133,655 is £39,499.95 so I was planning an a figure just below that of £39,490 for my APC.  I will get 25% of the APC back as tax-free and I will drawdown the rest when I can to stay within my 20% tax band.

I just checked and my actual total salary this FY will be £59,217, so with the pensions payments received that will be a total taxable income this FY of £86148.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

So contributing £49,362 (gross) isn't going to specifically achieve your aims.

You will be further away from achieving them now you have reduced your taxable income by £1k.

Still don't understand the rationale for this specific contribution.  

You seen conflicted between minimizing your tax liability and contributing 30% of your lump sum.  But contributing 30% of your lump sum contradicts your comment about not wanting to pay unnecessary funds into the DC pot.

Audaxer

Linton said:

WIth a DB pension you have to take the lump sum when you start receiving the pension and you may have to take the pension at the specificed age, so it is difficult to see how pre-planning could be demonstrated.

With a lot of DB pensions you have a choice of whether to take a tax free lump sum and reduced pension or no lump sum and the full pension, so in that case I think the lump sum would be subject to the same rules as a DC tax free lump sum.

MK62

0779mike said:

I am a UK resident, aged 66 and not yet taking the state pension.
Current taxable Income
I expect to receive a taxable income from employment of approx. £60k this financial year ending 5 April 2020.

Also, this financial year I will have received approx. £26,931 from two DB pensions from previous employers.  One of those has been paying up to £8758 for more than 5 years. The other commenced in May this year and in July I received the related, tax-free PCLS of £131,665.

So, my total taxable income this FY will be approx. £87,146.

DC Pensions
I have £23,015 in a DC scheme with my current employer with ongoing employee deductions from salary before tax, and employer contributions totalling £736.31 per month.
I have £34,041 in a flexi-drawdown SIPP.
My plan is to make an Additional Personal Contribution of £39,490 ( < 30% of £131,665) into the current DC scheme before 5 April 2020.  The administrator of the scheme (Std Life) will add 25% to my contribution. 
When I leave my current employment I will transfer the DC fund into my SIPP and take the tax free PCLS of 25%.
I will then draw as much taxable income from the SIPP as I can each year, to stay below the 40% tax band.
My expectation is that the APC will save me a significant amount of tax and will not be deemed to be "Lump Sum Recycling" as it is less that 30% of the £131,665 PCLS that I received a month ago.
BUT, some have suggested that I need to be careful of the 25% added on by the DC administrator.
Is £39,490 the correct amount to maximise tax avoidance and avoid Pension Lump Sum Recycling charges ?

Any help most welcome,  Mike

You might need to be careful here, as the claiming of the second PCLS, from the DC fund, could, depending on the amount, trigger another look at whether any recycling has occurred...... if you could withdraw using UFPLS, the tax free portion of this is, apparently, not considered to be PCLS for the purposes of recycling.
There's a good explanation here..... https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/
I'm not an expert here myself, but you would hope the Pru would know what they are talking about (though I expect the usual disclaimers would apply.. ).

You may also need to be careful about the second PCLS in relation to the LTA. Your DB pensions will already have used some of your LTA - they may already have used up over half of it. There's not enough info to give an exact answer here, but if they've used say 60% of your LTA, then this TY you'd only have £422000 left, which would restrict any further PCLS to £105500.
Again, it's explained here.....https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-commencement-lump-sum-tax-free-cash/

0779mike

Dazed_and_C0nfused said:

0779mike said:

One of the tests for Lump Sum Recycling is that it must be more than 30% of the tax -free lump sum taken.  30% of my lump sum of £133,655 is £39,499.95 so I was planning an a figure just below that of £39,490 for my APC.  I will get 25% of the APC back as tax-free and I will drawdown the rest when I can to stay within my 20% tax band.

I just checked and my actual total salary this FY will be £59,217, so with the pensions payments received that will be a total taxable income this FY of £86148.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

So contributing £49,362 (gross) isn't going to specifically achieve your aims.

You will be further away from achieving them now you have reduced your taxable income by £1k.

Still don't understand the rationale for this specific contribution.  

You seen conflicted between minimizing your tax liability and contributing 30% of your lump sum.  But contributing 30% of your lump sum contradicts your comment about not wanting to pay unnecessary funds into the DC pot.

I may have misunderstood the effect of an Additional Personal Contribution in my circumstances so if I may I will ask a couple of basic questions....
1) Can I reduce my tax burden in this financial year by making an APC ?
2) If so, what is the optimum figure that I should contribute ? 

Dazed_and_C0nfused

1). Yes
2). It depends on exactly how much of your income is going to be liable to tax at a rate greater than 20%