Pension recycling lump sum

smellogs

I no longer work, and wish to drawdown my sipp and take a lump sum of £30000. If my husband increases his sipp contribution for this tax year, and future tax years could he be accused of pension recycling? His earnings would be greater than his contributions.

Linton

You can only be seen to be recycling if money from your tax free lump sum goes directly or indirectly into your pensions.  If the money goes into someone else's pensions, eg your husband's, it is not classified as recycling.

jamesd

Based on guidance from HMRC you should take the money into an account in your sole name then gift it to him. This is because it's recycling and to be highly confident that it is recycling within what is allowed it mustn't be paid to a joint account with the spouse who will be making the contribution.

As a  practical matter HMRC has expressed a view characterisable as they don't care about individuals, only organised schemes, so it's unlikely that there will be trouble anyway. But it's easy to use different accounts and be certain, so do.

Audaxer

jamesd said:

Based on guidance from HMRC you should take the money into an account in your sole name then gift it to him. This is because it's recycling and to be highly confident that it is recycling within what is allowed it mustn't be paid to a joint account with the spouse who will be making the contribution.

jamesd, as you know, the HMRC guidance says the following under one of the rules where recycling will apply "because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be." 
My understanding of that rule is that if the lump sum is from a wife's SIPP, it would only count as recycling if the contribution was paid into one of the wife's own pension schemes. So even if the lump sum went into their joint account before being paid into the husband's SIPP, I don't understand how that could be classed as recycling?

jamesd

In the case of a joint account the individual is receiving the tax free lump sum even though they are the spouse of the pension scheme holder. See this post in one of the discussions linked from the SWR topic, my bold:

"In support of the answers given by PensionTech and others, 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!"

Not using a joint account is easy and avoids the potential risk. We have the required answers from HMRC that are needed to eliminate the risk, so best to use that help.

Milltir

'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".
To me this is not describing a joint account scenario, rather it seems to be describing scenario of a separate individual account in the name of the spouse (or some other person).

jamesd

If you read the previous sentence it says "is paid to the original member first". Either follow the recommendations as a consequence of pros who've discussed it with HMRC or if it's your own money feel free to possibly have to argue with HMRC whether an account in joint names is being paid to the original partner or their spouse or both simultaneously. It's easy to avoid that argument, so best to avoid it.

If you read those past discussions you'll find that I previously held views more aligned with your own. Then I read the posts by the experts and changed my mind.

Audaxer

jamesd said:

In the case of a joint account the individual is receiving the tax free lump sum even though they are the spouse of the pension scheme holder. See this post in one of the discussions linked from the SWR topic, my bold:

"In support of the answers given by PensionTech and others, 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!"

Not using a joint account is easy and avoids the potential risk. We have the required answers from HMRC that are needed to eliminate the risk, so best to use that help.

This Pension recycling (pruadviser.co.uk) page says the following under the paragraph numbered 4:
"An individual may use their PCLS to pay a pension contribution on behalf of another, eg spouse, civil partner, child etc and this cannot be considered PCLS recycling. It needs to be the same individual, who receives the PCLS and benefits from the new pension contribution, for PCLS recycling to be a possibility." 
Their interpretation of the rule seems to indicate that it is okay for a pension lump sum to be used by the individual (the wife in this example) to pay a pension contribution direct into her husband's pension. Is their interpretation of the rule not correct? 

jamesd

It's OK provided the PCLS isn't paid to the other individual, that is, into a bank account that they have control over, which includes joint accounts where both have complete control.

No conflict there, besides the discussion here fleshing out just what it means to pay an individual.

Audaxer

jamesd said:

It's OK provided the PCLS isn't paid to the other individual, that is, into a bank account that they have control over, which includes joint accounts where both have complete control.

No conflict there, besides the discussion here fleshing out just what it means to pay an individual.

Okay, does that mean that if the wife's PCLS is paid into an account in her own name, it is okay for her to pay contributions direct into the husband's SIPP?  

Linton

Audaxer said:

jamesd said:

It's OK provided the PCLS isn't paid to the other individual, that is, into a bank account that they have control over, which includes joint accounts where both have complete control.

No conflict there, besides the discussion here fleshing out just what it means to pay an individual.

Okay, does that mean that if the wife's PCLS is paid into an account in her own name, it is okay for her to pay contributions direct into the husband's SIPP?  

Yes, if the husband has sufficient earned income to cover the payment.  Note that the contribution would be 80% of the gross payment - eg if the PCLS is £20K the husband  would need earnings of at least £25K

Though in practice the money would probably have to go through a debit card in the husband's name. That is certainly the case for paying online with Bestinvest and AJBell.