Pension recycling 30% rule

smellogs

Our fixed rate mortgage is up for renewal soon. I am wondering if we could take a tax free lump sum of £70000  from my husband’s SIPP, without falling foul of recycling rules, to pay off the mortgage and make some home improvements. My husband is self employed and contributes as much as possible into the SIPP.
The contributions are as follows 
Tax Year 19/20 £33062
Tax year 20/21 £40000
Tax year 21/22 £35000 estimate 
Tax year 22/23 £40000 maximum 
Tax year 23/24 £40000 maximum 
He does not take an income from his SIPP.

Marcon

How much is in the SIPP at present? If he takes a penny more than 25% of the value of the SIPP at the time of the withdrawal, he'll trigger the Money Purchase Annual Allowance and be limited to a maximum of £4,000 a year for every future year. In other words, to take out £70,000 means there must be £280,000 in the SIPP immediately before he withdraws the lump sum.

smellogs said:

Our fixed rate mortgage is up for renewal soon. I am wondering if we could take a tax free lump sum of £70000  from my husband’s SIPP, without falling foul of recycling rules, to pay off the mortgage and make some home improvements. My husband is self employed and contributes as much as possible into the SIPP.
The contributions are as follows 
Tax Year 19/20 £33062
Tax year 20/21 £40000
Tax year 21/22 £35000 estimate 

Forget future years - the pattern which needs to be established to avoid falling foul of recycling is years where contributions have already been made. It would be helpful if you could pay the full £40K this tax year, but if not, you are still likely to be OK - see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and get the info straight from the horse's mouth.

Your other thread from last month has a lot of helpful info: https://forums.moneysavingexpert.com/discussion/6306139/pension-recycling-lump-sum/p2. Even if you aren't earning, you could pay £2,880 into your SIPP and it would be topped up to £3,600 by the provider claiming tax relief on your behalf, even if you haven't paid tax in the first place.

jamesd

The first requirement for there to even possibly be recycling of a pension tax free lump sum beyond the permitted limits is that there must have been an increase in pension contributions of some sort in the two years before the tax year of the lump sum, its tax year and the two following tax years, all combined.

You can show that the money came from the pension and went to other things and that should be ample proof.

However, lets look at those five years and the 30% rule. First, we have no idea whether 19/20 was a decrease, same or increase of £33,062 because we know nothing about the previous pattern of contributions. Which means that possible increases range from negative to 33,062 + 40,000 + 35,000 + 40,000 + 40,000. That'd be way more than 30%. But it's still irrelevant if there's no recycling going on, and since you can prove it, there's no need to worry about it.

As Marcon wrote, he should use a tax free lump sum of up to 25% of the value of the pot and place the 75% into flex-access drawdown or he'll trigger the money purchase annual allowance restriction to 4k a year of ongoing pension contributions.

If 25% isn't enough then he can use the small pots rule. That allows taking the whole of a pot worth up to 10k as a sum that is 25% tax free and 75% taxable. You can do this up to three time in your lifetime. You're allowed to do transfers to create the transfers and Hargreaves Lansdown will make this more convenient by doing it behind the scenes for you. This way you can get an extra 3 times 7,500 minus tax on top of the 3 times 2,500 that you'd get sticking just to the previous paragraph. The small pot rule doesn't trigger the MPAA. Note that this is the same tax free split as UFPLS but it is not UFPLS and you must not use UFPLS because that does trigger the MPAA.

smellogs

Thank you Marcon and jamesd 
When taking the 25% lump sum , the MPAA would not be triggered.
He started the SIPP in 2013 contributions as follows
12/13 nil
13/14 £27500
14/15 £22000
15/16 £30000
16/17 £35000
18/19 £38000
19/20 £33062
20/21 £40000
I am confused as to how far back HMRC would look to establish a pattern of contributions. I have looked at the links you have kindly provided but remain unsure. He has taken £7500 lump sum for the past few years, which is within the recycling rules provided that more than 12 months elapse. I was just considering whether it would be possible to take a bigger lump sum without falling foul of the recycling rules. I need to establish how HMRC would calculate the expected pension contribution for this tax year and the following two tax years. Then we would know how much lump sum could be taken without repercussions, and what the maximum amount that could be contributed in the following years.

Marcon

smellogs said:

Thank you Marcon and jamesd 
When taking the 25% lump sum , the MPAA would not be triggered.
He started the SIPP in 2013 contributions as follows
12/13 nil
13/14 £27500
14/15 £22000
15/16 £30000
16/17 £35000
18/19 £38000
19/20 £33062
20/21 £40000

The figures you've given total £225,562 (plus growth/minus charges). If he's been taking cash of £7,500 for 'the past few years', that means  £22,500 each time he takes £7,500 needs to be discounted when he takes the planned £70,000 (he can't draw any more tax free cash against these amounts - including any growth on them).

You might want to double check that there really is enough scope for him to avoid the MPAA. There needs to be at least £280,000 of 'untouched' funds in his SIPP when he draws the £70,000.

Ignoring growth and charges, it doesn't look likely:

£225,562  paid in
-£15,000 (at least) drawn as tax free lump sums
-£45,000 (funds not available to provide further tax free cash)

= £165,562 available to provide tax free cash, making the maximum £41,390

smellogs

Thanks for the response Macron
£7500 has been withdrawn five times and the SIPP was started with a transfer in of £75k from another fund. Along with this years  contribution there should be £280000 of uncrystallised funds. Sorry forgot to mention the transfer in , in my last post.

MX5huggy

Mortgage vs Pension is debated to death on here. Admittedly in the context of extra pension contributions vs mortgage over payments normally. I don’t see that taking money out of pension while still working to pay off what is presumably very cheap mortgage is the best thing to do, although it might be the most prudent. 

jamesd

HMRC can go as far back as they like and are also supposed to take into account things like varying wages or profits that explain changes in ways other than use of a tax free lump sum.

My overall impression here is that you have nothing to worry about because:

1. You can prove that the big lump sum wasn't used for new pension contributions.
2. The £7,500 years were within what's permitted.

HMRC has to prove that it was used for recycling beyond the limits, burden of proof on them not you. And that mortgage repaying, clearly not borrowing done initially to fund pension contributions, seems like an utterly impossible argument for them to counter because it proves where the money went.

Whether it's a good move to withdraw pension tax free lump sum money to repay a mortgage is an interesting question. I've been able to do it for a few years and haven't, though I have at times been fully offset.

Albermarle

smellogs said:

Thanks for the response Macron
£7500 has been withdrawn five times and the SIPP was started with a transfer in of £75k from another fund. Along with this years  contribution there should be £280000 of uncrystallised funds. Sorry forgot to mention the transfer in , in my last post.

On previous threads on this subject , it is usually mentioned that HMRC do not seem very interested in pursuing recycling cases, especially if it is not a cut and dried case.
Some say that in fact no individual has ever been penalised , although difficult to prove that of course.

smellogs

Thank you all for your input. All things considered we will look at fixing the mortgage for five years,  and continue to crystallise £30k per annum taking £7500 as a lump sum. That way we stay within the recycling rules, and look at the situation five years from now. 

jamesd

That seems like a good move to me.

What you might consider is using the £7,500 each year to reduce the capital, if it's within the mortgage limits. The reason for this is to cover both possibilities: that markets continue to do well or that they drop a lot and stay down. This way whatever happens you've achieved some benefit, and reduced potential loss. We don't know the future but we can try hedging against the various outcomes.