Pension recycling

caro69

My husband has a very old zurich ex allied Dunbar pension which is currently worth £27000.  It is his only pension.  He is 63. It is inflexible and the only way he can use it is by taking his 25 per cent tax free and then an annuity.  Clearly the annuity is going to pay peanuts.  As he is not working at present the plan is to cash it in and take the hit on the tax before it reaches £30000 value under the triviality pension rules.  The cost of transferring it far out ways the tax. 

I have my own sipp with around £13000 in.  He is 63 and I am 57.  I earn £12000 a year and was thinking of putting some of his pension monies into my pension as a way of keeping it invested and to take advantage of the extra tax relief.  I know I can only invest up to what I earn.  Then I read about pension recycling and I'm not sure if this would be allowed. 
I don't want to break any laws just looking for a sensible way of investing it as cash is obviously a no no.  Any thoughts appreciated. 

NedS

What costs are associated with transferring it into something like a SIPP where he could withdraw over a number of tax years to minimise income tax? Is your Husband currently working? Does he currently have and taxable income?

Here is a good overview of pension recycling rules:

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

I'm not an expert on pension recycling rules, but my understanding would be any monies you pay into your pension are completely unrelated to your husband and his pension (others here will correct me if I am wrong). You are contributing your earnings to your pension, and you (as a household) are living on your husbands pension in lieu of your earnings which have been paid into your pension. So no recycling of your husbands tax free cash as he hasn't paid it into his pension.

Linton

What you propose is not pension recycling as it is moving money from one person to another.  You can only recycle the proceeds from your own pension.

Why do you believe transferring out of the old Allied Dunbar pension would be expensive?  Isn't it a Defined Contribution pension?  If so, advice would only be requirerd if it had valuable guarantees, and if so it may be a bad idea to transfer it anyway.  If it is a simple DC pension it could be transferred to somewhere which does permit drawdown at probably zero cost.  Then you could split the drawdown over 2 years avoiding any tax.

caro69

NedS said:

What costs are associated with transferring it into something like a SIPP where he could withdraw over a number of tax years to minimise income tax? Is your Husband currently working? Does he currently have and taxable income?

Here is a good overview of pension recycling rules:

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

I'm not an expert on pension recycling rules, but my understanding would be any monies you pay into your pension are completely unrelated to your husband and his pension (others here will correct me if I am wrong). You are contributing your earnings to your pension, and you (as a household) are living on your husbands pension in lieu of your earnings which have been paid into your pension. So no recycling of your husbands tax free cash as he hasn't paid it into his pension.

Thanks ned.  He really does have a duff pension here.  The transfer fees are huge.  We have had this confirmed by a couple of different advisers over the years as being a complete no no, hence why we have left it were it is. It's put on growth this year, hence we are getting near the £30000 so we need to act.  He is not working at present and unlikely to be during the current tax year.  So it is probably a good year to withdraw the whole lot (income tax will be £1500 ish).  That's why I thought that if I get as much as I can into my SIPP we can draw that down in due course.
Thanks for your thoughts on the recycling and for the link.

caro69

Linton said:

What you propose is not pension recycling as it is moving money from one person to another.  You can only recycle the proceeds from your own pension.

Why do you believe transferring out of the old Allied Dunbar pension would be expensive?  Isn't it a Defined Contribution pension?  If so, advice would only be requirerd if it had valuable guarantees, and if so it may be a bad idea to transfer it anyway.  If it is a simple DC pension it could be transferred to somewhere which does permit drawdown at probably zero cost.  Then you could split the drawdown over 2 years avoiding any tax.

 We have had this confirmed by a couple of different advisers over the years that it is just not worth transferring it because of the high charges.  He can take the whole lot this year for approx £1500 tax as he will not be working in this tax year.  I'm not sure if it is Defined Contribution pension.  It is a personal pension plan that was sold to him in the early 90s when he decided to go self employed, so no employer has paid anything into it.  I don't believe it has any guarantees of any sort.
I got about concerned when I read about pension recycling so it's good to know I am worrying unnecessarily on that one.  The plan would be to get as much of the lump sum into it as possible although I realise that is going to take a couple years as my current salary is about £12000 and I have already make regular contributions.  At least then our pensions would be in one place for us to drawdown later on when we need to do so.

Albermarle

He really does have a duff pension here.  The transfer fees are huge.  We have had this confirmed by a couple of different advisers over the years as being a complete no no, hence why we have left it were it is.

This does not sound right . Have you contacted Zurich directly yourself and asked them about transfer charges ?

Normally they should be zero , or if they do exist, not that large . 

At least one SIPP will actually refund any transfer charges if you transfer to them up to a max of £500 ( terms and conditions apply)

caro69

NAlbermarle said:

He really does have a duff pension here.  The transfer fees are huge.  We have had this confirmed by a couple of different advisers over the years as being a complete no no, hence why we have left it were it is.

This does not sound right . Have you contacted Zurich directly yourself and asked them about transfer charges ?

Normally they should be zero , or if they do exist, not that large . 

At least one SIPP will actually refund any transfer charges if you transfer to them up to a max of £500 ( terms and conditions apply)

No he hasn't.  The advice is from an local finance advisor who we have used in the past so I was taking the advice on trust, bearing in mind that we have been told similar by a couple of advisers many years ago.   I will get him to give Zurich a ring himself.  Thank you.

Dazed_and_C0nfused

At least then our pensions would be in one place for us to drawdown later on when we need to do so.

You are running the risk of some of it being taxed twice though.

If he does end up taking it all in one tax year then there is £1,500 tax to pay as you have already mentioned.

But you would then be adding most of it to your pension so 25% would be tax free when eventually taken but 75% would become taxable income in your name. 

It seems like you wouldn't be making best use of your Personal Allowances meaning you will pay some basic rate tax whilst your husband's goes unused.

Also, in the current tax year what do you expect your P60 to show your taxable income as? 

It may be there is a way if reducing the £1,500 tax your husband would be paying if he does decide to take it all in one go. 

NottinghamKnight

caro69 said:

NAlbermarle said:

He really does have a duff pension here.  The transfer fees are huge.  We have had this confirmed by a couple of different advisers over the years as being a complete no no, hence why we have left it were it is.

This does not sound right . Have you contacted Zurich directly yourself and asked them about transfer charges ?

Normally they should be zero , or if they do exist, not that large . 

At least one SIPP will actually refund any transfer charges if you transfer to them up to a max of £500 ( terms and conditions apply)

No he hasn't.  The advice is from an local finance advisor who we have used in the past so I was taking the advice on trust, bearing in mind that we have been told similar by a couple of advisers many years ago.   I will get him to give Zurich a ring himself.  Thank you.

If it's a defined contribution scheme with no guaranteed benefits then it can be transferred without any advice to any other provider. What may be happening is when you have asked the question to the FA they have estimated their fees, which could be a few grand, and determined that would be a very high percentage of the pension pot, you don't need them to do it and diy would be low cost or free.

caro69

NottinghamKnight said:

caro69 said:

NAlbermarle said:

He really does have a duff pension here.  The transfer fees are huge.  We have had this confirmed by a couple of different advisers over the years as being a complete no no, hence why we have left it were it is.

This does not sound right . Have you contacted Zurich directly yourself and asked them about transfer charges ?

Normally they should be zero , or if they do exist, not that large . 

At least one SIPP will actually refund any transfer charges if you transfer to them up to a max of £500 ( terms and conditions apply)

No he hasn't.  The advice is from an local finance advisor who we have used in the past so I was taking the advice on trust, bearing in mind that we have been told similar by a couple of advisers many years ago.   I will get him to give Zurich a ring himself.  Thank you.

If it's a defined contribution scheme with no guaranteed benefits then it can be transferred without any advice to any other provider. What may be happening is when you have asked the question to the FA they have estimated their fees, which could be a few grand, and determined that would be a very high percentage of the pension pot, you don't need them to do it and diy would be low cost or free.

That would make sense I guess.  I didn't seek their advice for this, I had a phone call from them.  I have emailed them to ask for the clarification and will get hubby to phone Zurich on Monday.

jamesd

While it's recycling, so long as the tax free money received within a rolling twelve month period by her doesn't exceed £7,500 it's permitted. Since 25% of £30,000 is £7,500 we can be certain that just his pot worth no more than £30,000 won't produce any extra HMRC charges beyond just income tax, so caro69 can ignore this.

Linton said:

What you propose is not pension recycling as it is moving money from one person to another.  You can only recycle the proceeds from your own pension.

Not so. It's still recycling and potentially caught by the rules that restrict the recycling of tax free lump sums. Based on guidance that HMRC have given people it's why I write that one party should get the money into an account in their sole name and give it to the other person into an account in their own sole name. This post is key:

"back in 2014 the firm I work for sent a query to HMRC regarding a similar situation.

We queried a situation where an individual received their tax free cash, gifted some of this to their spouse, and the spouse made a significant contribution to their pension. We asked whether this would be caught under the recycling rules, indicating that we thought it would not because the contributions paid by the spouse were not paid into a registered pension scheme "in respect of the individual" who had received the tax free cash.

We were told in writing that we were interpreting the legislation correctly and that this would not be caught by the recycling rules.

Worth mentioning that it is potentially important that the tax free cash is paid to the original member first, and not directly to the spouse. We've recently received confirmation in writing that payment of tax free cash to someone other than the original member (for example directly into a bank account in the name of their spouse) is potentially going to lead to tax charges. It is possible this could be challenged successfully if a case ever arose, but perhaps best not to test that out!"

I used to have the same view as you but no longer do.