Pension recycling?

lippy_sm2

I stopped paying into my defined benefit (DB) pension in 2015 having paid all that I needed to for a full pension for over 30 years.

Since then I have placed the maximum amount allowed, £40,000 gross, into a (DC) SIPP for 4 years. (I had funds offsetting my mortgage, Premium Bonds, shares and a payment from a legal case to invest.)

I have just received a commutation sum from my DB pension on retirement (see below).

I am now again working for the same employer having been re-employed by them following my retirement but have opted out of any new DB pension arrangement.

I have not touched my DC SIPP.

I had planned to invest my DB commutation in property but am now not able to due to current circumstances.

As I am working  and have no intention of touching my DC SIPP I am asking if I am able to make contributions to my SIPP from my commutation without incurring the wrath of HMRC?

As detailed above the contributions to the SIPP are not pre planned. I am currently working and will earn about £60 to £65,000 this year. I will probably carry on in this employment for another 5 years.

The Pension Advisory Service couldn't give me a definitive answer but quoted the recycling rules which seemed to not apply as it is not pre planned by due to changing recent events.

Other info online suggests that as it is from a DB pension the recycling rules do not apply in any case?

Could anyone confirm that I am able to do increase my SIPP in this way.

Brynsam

lippy_sm2 said:

I stopped paying into my defined benefit (DB) pension in 2015 having paid all that I needed to for a full pension for over 30 years.

Since then I have placed the maximum amount allowed, £40,000 gross, into a (DC) SIPP for 4 years. (I had funds offsetting my mortgage, Premium Bonds, shares and a payment from a legal case to invest.)

I have just received a commutation sum from my DB pension on retirement (see below).

I am now again working for the same employer having been re-employed by them following my retirement but have opted out of any new DB pension arrangement.

I have not touched my DC SIPP.

I had planned to invest my DB commutation in property but am now not able to due to current circumstances.

As I am working  and have no intention of touching my DC SIPP I am asking if I am able to make contributions to my SIPP from my commutation without incurring the wrath of HMRC?

As detailed above the contributions to the SIPP are not pre planned. I am currently working and will earn about £60 to £65,000 this year. I will probably carry on in this employment for another 5 years.

The Pension Advisory Service couldn't give me a definitive answer but quoted the recycling rules which seemed to not apply as it is not pre planned by due to changing recent events.

Other info online suggests that as it is from a DB pension the recycling rules do not apply in any case?

Could anyone confirm that I am able to do increase my SIPP in this way.

Whether the lump sum comes from a DB or a DC scheme isn't relevant when it comes to recycling.

Nobody here can confirm for certain that the recycling rules will definitely not apply; you will need to read the rules and make your own assessment of the position. Have a look at HMRC's own manual (surprisingly readable for a tax publication!): https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810

Audaxer

lippy_sm2 said:

Since then I have placed the maximum amount allowed, £40,000 gross, into a (DC) SIPP for 4 years. 

From what you have said I don't think the following rule, copied from the HMRC Manual, applies to you:
"the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830"
If you have paid £40k into the SIPP for each of the last 4 years, I don't think you could exceed these contributions by 30% after receiving the lump sum even if you wanted to, as you already have been paying the maximum annual contributions to the SIPP. So as this condition has not been met, I don't think it could be classed as recycling.

jamesd

"I stopped paying into my defined benefit (DB) pension in 2015 having paid all that I needed to for a full pension for over 30 years ... Since then I have placed the maximum amount allowed, £40,000 gross, into a (DC) SIPP for 4 years"

Your initial situation seems clear. You reached the limit of useful DB contributions four years ago and since then you've been using the full annual allowance of 40k for DC. You've clearly established an AA expected amount and because the AA has not been increased with inflation the value of your contributions has been decreasing.

You can't be expected to stop normal retirement planning just because you hit the DB limit and had to switch to DC to continue.

"As I am working  and have no intention of touching my DC SIPP I am asking if I am able to make contributions to my SIPP from my commutation without incurring the wrath of HMRC?" initially seems to be yes. The recycling rules address an increase in contributions above what would normally be expected. Expected for you is the 40k AA so there's no increase at all, even though you're recycling.

A potential argument from HMRC involves challenging the 40k expected amount, by trying to argue that it's less than 40k. That seems a tough argument: your finances now include work and pension income (no restrictions on recycling DB pension income) as well as the lump sum so if your income is higher your contributions might be expected to increase if it wasn't for the AA capping them.

Another  potential argument that HMRC could make involves "(I had funds offsetting my mortgage, Premium Bonds, shares and a payment from a legal case to invest.)". Per HMRC: "Circumstances where the recycling rule does not apply 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." All of the  sources you've mentioned are savings or windfall and covered by that but HMRC could try it on by arguing that withdrawing from a mortgage offset account was borrowing, not savings. They should expect to lose that argument because of the way that the FSCS covers offset savings when it doesn't cover borrowed amounts. Their purpose  would be to try to undermine the 40k expected contribution pattern.

So,in your situation I'm not concerned. You could further improve your position by taking the SIPP tax free lump sum because an increase by more than 30% of the combined lump sum is one of the thresholds an that's easier with bigger lump sums. But your planned increase is nil anyway.

You not planning to buy property in a buyer's market is a bit surprising.

lippy_sm2

Thank you. Very much.
The money from the offset mortgage was sitting in 'savings pots' under the offset umbrella so should be ok.
The plan to invest in property was to extend or buy a larger property rather than buy another property. Due to a change in personal circumstances that is not now happening.

Would it be wise to run this by HMRC or just pay the money in.

Brynsam

lippy_sm2 said:

Thank you. Very much.
The money from the offset mortgage was sitting in 'savings pots' under the offset umbrella so should be ok.
The plan to invest in property was to extend or buy a larger property rather than buy another property. Due to a change in personal circumstances that is not now happening.

Would it be wise to run this by HMRC or just pay the money in.

HMRC won't tell you in advance, but simply refer you to the legislation. You have to do it first (wonderful, isn't it?).

lippy_sm2

That makes perfect sense!!!!!!!!