pension recycling/lump sum and contributing £2880

frugal90

I hope someone with more understanding than I can answer a question.
I am front running my teachers pension with a SIPP which I am drawing down over three years.
In Dec I contributed £2880 to the SIPP which will be grossed up to £3600 in the next few days. 
I am going to make the next drawdown nomination in the next few days, which will be the final one except for keeping £50 in the SIPP.
The lump sum I will receive will be about £8000 straight away with 12 equal income payments from April 2021.
will I therefore have been deemed to have broken the pension recycling rules because the lump sum is over £7500?

Also, I had planned to keep the SIPP open then contribute £2880 each year grossed up to £3600.
In May 2022 I will get my teachers pension and the lump sum, does the lump sum from the teachers pension count as being above the £7500 and therefore mean that in that year I couldn't contribute the £2880?

It's all quite difficult to understand

thanks 

Dazed_and_C0nfused

You only seem to be telling us about the PCLS not how the current pot was funded. 

This might be worth a read,
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

What is pension recycling?

Pension recycling is where a pension commencement lump sum (PCLS), or flexible pension income, is recycled back into a pension as a tax relievable contribution. Legislation is in place to ensure the system that provides tax relief on pension contributions is not abused, with Pension Commencement Lump Sums subject to PCLS recycling rules and those who flexibly access their pension being limited by the Money Purchase Annual Allowance for future defined contribution pension contributions.

In this article we will focus on PCLS recycling and Flexi-access income recycling. Please note that recycling non-flexibly accessed pension income, such as unrequired income from a defined benefit scheme, would not (in itself) result in the triggering of the MPAA.

PCLS Recycling rules

Recycling rules were originally designed to prevent pension holders from abusing the tax incentives provided by pensions, by using a PCLS to make further pension contributions (hence gaining further tax relief on monies that had already benefited from tax relief). The rules introduced to prevent this lump sum recycling may have a limiting effect on income recycling. The lump sum recycling rules consist of six conditions; if all conditions are met the amount of the pension commencement lump sum is treated as an unauthorised member payment and charged accordingly. The six conditions are:

the individual receives a pension commencement lump sum

because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be.

the additional contributions are made by the individual or by someone else, such as an employer

the recycling was pre-planned.

the amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds:

   - £7,500 for events on or after 6 April 2015, or

   - 1% of the standard lifetime allowance for events before 6 April 2015

and the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.

PTM033810

As long as one of the conditions can be discounted, the PCLS recycling rules do not apply 

pensionpawn

Dazed_and_C0nfused said:

You only seem to be telling us about the PCLS not how the current pot was funded. 

This might be worth a read,
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

What is pension recycling?

Pension recycling is where a pension commencement lump sum (PCLS), or flexible pension income, is recycled back into a pension as a tax relievable contribution. Legislation is in place to ensure the system that provides tax relief on pension contributions is not abused, with Pension Commencement Lump Sums subject to PCLS recycling rules and those who flexibly access their pension being limited by the Money Purchase Annual Allowance for future defined contribution pension contributions.

In this article we will focus on PCLS recycling and Flexi-access income recycling. Please note that recycling non-flexibly accessed pension income, such as unrequired income from a defined benefit scheme, would not (in itself) result in the triggering of the MPAA.

PCLS Recycling rules

Recycling rules were originally designed to prevent pension holders from abusing the tax incentives provided by pensions, by using a PCLS to make further pension contributions (hence gaining further tax relief on monies that had already benefited from tax relief). The rules introduced to prevent this lump sum recycling may have a limiting effect on income recycling. The lump sum recycling rules consist of six conditions; if all conditions are met the amount of the pension commencement lump sum is treated as an unauthorised member payment and charged accordingly. The six conditions are:

the individual receives a pension commencement lump sum

because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be.

the additional contributions are made by the individual or by someone else, such as an employer

the recycling was pre-planned.

the amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds:

   - £7,500 for events on or after 6 April 2015, or

   - 1% of the standard lifetime allowance for events before 6 April 2015

and the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.

PTM033810

As long as one of the conditions can be discounted, the PCLS recycling rules do not apply 

The £7500 figure can only impact what you additionally pay in, it's a trigger point, and has no influence on the amount you take out. In fact the more you take out over £7500 the more flexibility you have as one of the decision points is "are your additional contributions greater than 30% of your TFLS". So for someone who takes out £250k that rule would allow you to increase contribution by £75kpa! However that would no doubt bring its own, different, complications. The way I see it is that if your pot is £200k and you take £50k as your 25% TFLS, someone who was contributing £10k pa could contribute an additional £15K (30% of £50k, if salary permits) as this does not breach its associated rule, and all rules need to be breached for recycling to occur. In your case you're taking £8000 so you can increase your contributions (above what you are currently contributing) by 30%, £2400, before recycling could be considered to occur.

frugal90

current pot came from income when working
I have remaining £32K to drawdown which I will over the next year

that means a lump sum of 8K
"and the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum."

what does that actually mean?

Albermarle

You should be aware that even if you were technically recycling ( and I do not think you are ) the chances of HMRC investigating it for these sums are about zero . 

Mick70

pensionpawn said:

Dazed_and_C0nfused said:

You only seem to be telling us about the PCLS not how the current pot was funded. 

This might be worth a read,
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

What is pension recycling?

Pension recycling is where a pension commencement lump sum (PCLS), or flexible pension income, is recycled back into a pension as a tax relievable contribution. Legislation is in place to ensure the system that provides tax relief on pension contributions is not abused, with Pension Commencement Lump Sums subject to PCLS recycling rules and those who flexibly access their pension being limited by the Money Purchase Annual Allowance for future defined contribution pension contributions.

In this article we will focus on PCLS recycling and Flexi-access income recycling. Please note that recycling non-flexibly accessed pension income, such as unrequired income from a defined benefit scheme, would not (in itself) result in the triggering of the MPAA.

PCLS Recycling rules

Recycling rules were originally designed to prevent pension holders from abusing the tax incentives provided by pensions, by using a PCLS to make further pension contributions (hence gaining further tax relief on monies that had already benefited from tax relief). The rules introduced to prevent this lump sum recycling may have a limiting effect on income recycling. The lump sum recycling rules consist of six conditions; if all conditions are met the amount of the pension commencement lump sum is treated as an unauthorised member payment and charged accordingly. The six conditions are:

the individual receives a pension commencement lump sum

because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be.

the additional contributions are made by the individual or by someone else, such as an employer

the recycling was pre-planned.

the amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds:

   - £7,500 for events on or after 6 April 2015, or

   - 1% of the standard lifetime allowance for events before 6 April 2015

and the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.

PTM033810

As long as one of the conditions can be discounted, the PCLS recycling rules do not apply 

The £7500 figure can only impact what you additionally pay in, it's a trigger point, and has no influence on the amount you take out. In fact the more you take out over £7500 the more flexibility you have as one of the decision points is "are your additional contributions greater than 30% of your TFLS". So for someone who takes out £250k that rule would allow you to increase contribution by £75kpa! However that would no doubt bring its own, different, complications. The way I see it is that if your pot is £200k and you take £50k as your 25% TFLS, someone who was contributing £10k pa could contribute an additional £15K (30% of £50k, if salary permits) as this does not breach its associated rule, and all rules need to be breached for recycling to occur. In your case you're taking £8000 so you can increase your contributions (above what you are currently contributing) by 30%, £2400, before recycling could be considered to occur.

I think the 30% additional conts is not per year , it is cumulative over a 5 year period .
however as others have said it has to be pre planned , and using the lump sum to fund those contributions and rightly so as if get a tax free lump sum and pay that back into a pension then it’s a fiddle really , but if not using that lump sum in any way at all to make the contributions and wasn’t pretty planned then should be fine . It would be very difficult for hmrc to
prove , unless obvious fraud .
if in doubt contact hmrc ?  Or an IFA 

Mick70

Pre planned not pretty planned 😀

frugal90

thanks everyone, seems as if I shouldn't worry about this too much.

Albermarle

frugal90 said:

thanks everyone, seems as if I shouldn't worry about this too much.

Correct Conclusion !

jamesd

Don't worry about it but if you do, you have an easy solution: the small pot rule. This has the same 25% tax free and 75% taxable treatment as UFPLS but unlike UFPLS the 25% isn't a pension commencement lump sum. The recycling limits only apply to PCLS money. 

pensionpawn

Mick70 said:

pensionpawn said:

Dazed_and_C0nfused said:

You only seem to be telling us about the PCLS not how the current pot was funded. 

This might be worth a read,
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

What is pension recycling?

Pension recycling is where a pension commencement lump sum (PCLS), or flexible pension income, is recycled back into a pension as a tax relievable contribution. Legislation is in place to ensure the system that provides tax relief on pension contributions is not abused, with Pension Commencement Lump Sums subject to PCLS recycling rules and those who flexibly access their pension being limited by the Money Purchase Annual Allowance for future defined contribution pension contributions.

In this article we will focus on PCLS recycling and Flexi-access income recycling. Please note that recycling non-flexibly accessed pension income, such as unrequired income from a defined benefit scheme, would not (in itself) result in the triggering of the MPAA.

PCLS Recycling rules

Recycling rules were originally designed to prevent pension holders from abusing the tax incentives provided by pensions, by using a PCLS to make further pension contributions (hence gaining further tax relief on monies that had already benefited from tax relief). The rules introduced to prevent this lump sum recycling may have a limiting effect on income recycling. The lump sum recycling rules consist of six conditions; if all conditions are met the amount of the pension commencement lump sum is treated as an unauthorised member payment and charged accordingly. The six conditions are:

the individual receives a pension commencement lump sum

because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be.

the additional contributions are made by the individual or by someone else, such as an employer

the recycling was pre-planned.

the amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds:

   - £7,500 for events on or after 6 April 2015, or

   - 1% of the standard lifetime allowance for events before 6 April 2015

and the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.

PTM033810

As long as one of the conditions can be discounted, the PCLS recycling rules do not apply 

The £7500 figure can only impact what you additionally pay in, it's a trigger point, and has no influence on the amount you take out. In fact the more you take out over £7500 the more flexibility you have as one of the decision points is "are your additional contributions greater than 30% of your TFLS". So for someone who takes out £250k that rule would allow you to increase contribution by £75kpa! However that would no doubt bring its own, different, complications. The way I see it is that if your pot is £200k and you take £50k as your 25% TFLS, someone who was contributing £10k pa could contribute an additional £15K (30% of £50k, if salary permits) as this does not breach its associated rule, and all rules need to be breached for recycling to occur. In your case you're taking £8000 so you can increase your contributions (above what you are currently contributing) by 30%, £2400, before recycling could be considered to occur.

I think the 30% additional conts is not per year , it is cumulative over a 5 year period .
however as others have said it has to be pre planned , and using the lump sum to fund those contributions and rightly so as if get a tax free lump sum and pay that back into a pension then it’s a fiddle really , but if not using that lump sum in any way at all to make the contributions and wasn’t pretty planned then should be fine . It would be very difficult for hmrc to
prove , unless obvious fraud .
if in doubt contact hmrc ?  Or an IFA 

I am aware of the 5 year period, which extends before the TFLS event as well as after, and I admit that this is my grey area wrt the recycling rules as I can't find anything that pins this down exactly. If there is any concern at all, stick to a maximum of 30% uplift in annual contributions and use the remainder of your TFLS to uplift your wife / husbands contributions to as close to 100% of their salary as possible. That may also have the added advantage of evening out pot sizes and increasing the possibility that a couple can each withdraw their personal allowances out of their pots each year giving them a combined £25k tax free pa!