Has anyone ever done this.....

zagfles

It's been mentioned above but worth restating as I suspect it hasn't sunk in - you need to understand the recycling rules. If you substantially increase your contributions within a couple of years of taking a lump sum out of your pension it could trigger the HMRC recycling rules and end up with a big tax penalty. Google "HMRC recycling rules" for loads of helpful articles.

NedS

zagfles said:

It's been mentioned above but worth restating as I suspect it hasn't sunk in - you need to understand the recycling rules. If you substantially increase your contributions within a couple of years of taking a lump sum out of your pension it could trigger the HMRC recycling rules and end up with a big tax penalty. Google "HMRC recycling rules" for loads of helpful articles.

True, but in this example the OP is talking about borrowing or extending their mortgage in order to increase pension contributions, and then taking the PCLS to pay off the mortgage/debt, not to recycle into their pension. So any additional contributions would have already happened in advance to taking any tax free lump sums.

zagfles

NedS said:

zagfles said:

It's been mentioned above but worth restating as I suspect it hasn't sunk in - you need to understand the recycling rules. If you substantially increase your contributions within a couple of years of taking a lump sum out of your pension it could trigger the HMRC recycling rules and end up with a big tax penalty. Google "HMRC recycling rules" for loads of helpful articles.

True, but in this example the OP is talking about borrowing or extending their mortgage in order to increase pension contributions, and then taking the PCLS to pay off the mortgage/debt, not to recycle into their pension. So any additional contributions would have already happened in advance to taking any tax free lump sums.

Try reading the recycling rules! Do you really think they hadn't thought of that? It covers increased contributions both before and after taking the PCLS, as it states here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830#IDAUGPQB

And it covers the exact scenario you describe here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDA40PQB

"The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum."

barnstar2077

zagfles said:

NedS said:

zagfles said:

It's been mentioned above but worth restating as I suspect it hasn't sunk in - you need to understand the recycling rules. If you substantially increase your contributions within a couple of years of taking a lump sum out of your pension it could trigger the HMRC recycling rules and end up with a big tax penalty. Google "HMRC recycling rules" for loads of helpful articles.

True, but in this example the OP is talking about borrowing or extending their mortgage in order to increase pension contributions, and then taking the PCLS to pay off the mortgage/debt, not to recycle into their pension. So any additional contributions would have already happened in advance to taking any tax free lump sums.

Try reading the recycling rules! Do you really think they hadn't thought of that? It covers increased contributions both before and after taking the PCLS, as it states here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830#IDAUGPQB

And it covers the exact scenario you describe here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDA40PQB

"The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum."

I would assume though that it would have to be a pretty substantial change in contributions for anyone to notice.  I would imagine that  a lot of people up their contributions five years or so away from retirement, as they wake up one day and decide they had better finally do something to sort their finances out!  :  )

I guess increasing a mortgages term and then paying the difference into a pension over many years would be less noticeable, and certainly there would be no new loan taken out if investigated.  I understand that this not suitable for the OP.

drumtochty

I did this as the company I worked for had a final Salary Pension Scheme and a year before I retired at 57. I upped my AVC payment from £300 a month or £3,600 a year gross which it had been for 10 years to £17,200 a year.  That was £300 a month from my salary plus a cheque for £13,600. I discussed this with the pension department and they advised there would have no issue that "zagfles" is having kittens about. A poster on the Motely Fool UK board at the times was also warning of doom. My employer had an open relationship with the HMRC pensions department and ran it past then for my case in particular. In my case I received all AVC fund tax free as I increased AVC pot to 25% of the my ( company annual pension in retirement x 20 plus my AVC pot in a 75% to 25% ratio).

I have never had any issue from HMRC in the years after I retired from my previous long term employer. In my case rather than paying off my morgage as I earned. I bought company shares at a discount over 20 years and paid AVC's. I retired in the May, received the AVC lumpsum at the end of June and as my mortgage was a current account mortgage. At the end of June my current account went into credit and to this day is still in credit.

zagfles

barnstar2077 said:

zagfles said:

NedS said:

zagfles said:

It's been mentioned above but worth restating as I suspect it hasn't sunk in - you need to understand the recycling rules. If you substantially increase your contributions within a couple of years of taking a lump sum out of your pension it could trigger the HMRC recycling rules and end up with a big tax penalty. Google "HMRC recycling rules" for loads of helpful articles.

True, but in this example the OP is talking about borrowing or extending their mortgage in order to increase pension contributions, and then taking the PCLS to pay off the mortgage/debt, not to recycle into their pension. So any additional contributions would have already happened in advance to taking any tax free lump sums.

Try reading the recycling rules! Do you really think they hadn't thought of that? It covers increased contributions both before and after taking the PCLS, as it states here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830#IDAUGPQB

And it covers the exact scenario you describe here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDA40PQB

"The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum."

I would assume though that it would have to be a pretty substantial change in contributions for anyone to notice.  I would imagine that  a lot of people up their contributions five years or so away from retirement, as they wake up one day and decide they had better finally do something to sort their finances out!  :  )

I guess increasing a mortgages term and then paying the difference into a pension over many years would be less noticeable, and certainly there would be no new loan taken out if investigated.  I understand that this not suitable for the OP.

No need to guess or assume, the recycling rules are quite specific, they will apply in some circumstances but not others. It's well explained in a lot of articles, as well as the pension tax manual. Anyone thinking of upping their pension conts near the time they're going to take a PCLS needs to understand them, or risk a big tax bill.

zagfles

drumtochty said:

I did this as the company I worked for had a final Salary Pension Scheme and a year before I retired at 57. I upped my AVC payment from £300 a month or £3,600 a year gross which it had been for 10 years to £17,200 a year.  That was £300 a month from my salary plus a cheque for £13,600. I discussed this with the pension department and they advised there would have no issue that "zagfles" is having kittens about. A poster on the Motely Fool UK board at the times was also warning of doom. My employer had an open relationship with the HMRC pensions department and ran it past then for my case in particular. In my case I received all AVC fund tax free as I increased AVC pot to 25% of the my ( company annual pension in retirement x 20 plus my AVC pot in a 75% to 25% ratio).

I have never had any issue from HMRC in the years after I retired from my previous long term employer. In my case rather than paying off my morgage as I earned. I bought company shares at a discount over 20 years and paid AVC's. I retired in the May, received the AVC lumpsum at the end of June and as my mortgage was a current account mortgage. At the end of June my current account went into credit and to this day is still in credit.

I'm not sure what point you're trying to make. Your specific circumstances were checked and they didn't trigger the recycling rules. So the OP should do the same, right? Is that what you're trying to say? Do what you did, get their plan checked, to make sure there's no issue? Good, because that's exactly what I said above, maybe with added young felines for effect

But your post could be read as saying just because you didn't trigger the recycling rules then the OP won't either. The OP's circumstances won't be the same as yours. The size of the contribution, the size of the lump sum, timing etc will be different. So the OP does need to check.

jamesd

NedS said:

 So any additional contributions would have already happened in advance to taking any tax free lump sums.

Just to confirm, the rules are written to catch new borrowing, notably the five year rule that looks at the two  previous tax years, the year of the lump sum and the two following.