Rules on Pension Recycling

MB1970

Hi,

I am a deferred member of a DB Scheme that at 55, after the Actuarial Reduction, I currently stand to receive a £27000 p.a pension. I also have AVC's bolted on the side of this pension currently worth circa £55k, which I plan to take as a tax free lump.

Since being deferred from this pension (January 2022), my employer has moved me to a DC scheme with certain enhancements to try and partly compensate me for the closure of the DB scheme. This includes an allowance of an extra 10% I can take as cash or put into my DC scheme, I have to pay a minimum of 5%, they pay 10%. The extra 10% allowance tapers to 7.5 % in year 2 and then finally to 5% in year 3 for ever more.

I currently pay 30% into this DC scheme, so in essence an extra 15%.

I earn circa £65k a year.

In January 2025 I will be 55 and was thinking of drawing my deferred DB pension and taking the £55k AVC as tax free cash, but carry on working for another 2 to 3 years.

This is where I need some help................

Once I have took my DB Pension and the £55k, can I up my DC contribution from my earnings to max out the £40k a year, or is this classed as Pension Recycling?

I have looked on the HMRC website, and they only really talk about recycling Tax Free Lump Sums, and DC schemes, not the increasing earnings contributions.

I did ring HMRC and got a very strange answer of, I am not sure, you need to ask an accountant

Can anyone give an opinion please.

Kind Regards,

Martin.

zagfles

HMRC are interested in whether you're recycling tax free cash into a pension, it doesn't matter how you do it, eg pay it directly  into a SIPP, or indirectly by increasing your % salary sacrifice and using the tax free cash to live off etc. You can even get caught if you pay extra in before even getting the tax free cash, there's a 2 year window either side.

What they're interested in is whether, as a result of getting tax free cash, your pension contributions increase. Google "HMRC recycling rules" for the specifics, there are loads of useful articles on the subject inc flowcharts etc.  

Linton

Paying into a pension from the income from a DB pension is not recycling.   The £55K TFLS is more questionable.  There are a number of tests that all need to be met before a payment can be regarded as recycling.   So asking HMRC is unlikely to help - it all depends on the details.

See https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash for example.  There are several other similar pages on other websites, just google pension recycling.

Complex questions of taxation are often resolved by court cases.  However as far as I know no-one has ever been "charged" with pension recycling.  I believe it is more a shot across the bows to discourage accountants from being too clever.

Is taking your pension and TFLS now a good idea?  Why not simply leave the money where it is since you appear to have a good income?

Albermarle

Although there is an oft expressed opinion ( rightly or wrongly) that HMRC are not that interested in chasing 'recyclers' as long as it is not too blatant.

MB1970

Hi Linton,

By not drawing it, the DB pension goes up by circa £1100 a year, I intend to retire at 58 at the latest, so it makes more sense to have the DB pension early at 55, and invest more of my salary..............unless I am missing something here.......

Cheers,

Martin

NedS

I have found the flowchart on this page really easy to follow and should enable you to conclude whether or not it constitutes pension recycling:

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

zagfles

MB1970 said:

Hi Linton,

By not drawing it, the DB pension goes up by circa £1100 a year, I intend to retire at 58 at the latest, so it makes more sense to have the DB pension early at 55, and invest more of my salary..............unless I am missing something here.......

Cheers,

Martin

So if you delayed taking the DB you'd effectively get a 4% index linked annuity (presume the DB pension is index linked, possibly capped). As delaying a year means you'd lose £27k but gain £1100 extra DB pension. And similar if you delay further years.

4% is a pretty good rate for an index linked annuity at 55-60. Obviously you could make more if whatever you invest the extra contributions in do well, but that could go either way.

Also with £65k salary plus £27k pension, you'd be a bit into higher rate tax even if you contributed £40k to the DC scheme. Or well into it if you're in Scotland. You might have some carry forwards to use which could allow you to put more in.  But bear in mind possible salary increases.

OTOH the LTA is something else to look at, that can be a good reason to take the DB pension early.

MB1970

Hi Zagfles,

LTA not an issue as 20 x DB pension well under..........can't see me putting more than £100k in DC pension max.

Obviously if I consider transferring out my DB pension, exceeding the LTA comes into play........but that's conundrum for another day.

Cheers,

Martin.