Taking my DB pension, continuing to work, and paying higher contributions into my DC Pension

Sbee25

I have a final salary pension and want to take my pension and tax free lump sum now at age 55. The lump sum is to pay towards my mortgage. I still need to continue in full time employment. As I will then in effect have two incomes, one from my employment salary and the other from my final salary pension, I wanted to make higher DC Contributions into my DC pension directly from my salary. Having spoken to MoneyHelper, I've been advised that this could be considered as 'pension recycling' and so I could be penalised with a tax penalty as they would assume the higher payments were coming from my lump sum, which they won't be. I will just have more income and so would like to save more towards my pension. Has anyone else heard of this, and is there a way around it if I can prove that the contributions are not coming from my lump sum? 

Marcon

Sbee25 said:

I have a final salary pension and want to take my pension and tax free lump sum now at age 55. The lump sum is to pay towards my mortgage. I still need to continue in full time employment. As I will then in effect have two incomes, one from my employment salary and the other from my final salary pension, I wanted to make higher DC Contributions into my DC pension directly from my salary. Having spoken to MoneyHelper, I've been advised that this could be considered as 'pension recycling' and so I could be penalised with a tax penalty as they would assume the higher payments were coming from my lump sum, which they won't be. I will just have more income and so would like to save more towards my pension. Has anyone else heard of this, and is there a way around it if I can prove that the contributions are not coming from my lump sum? 

Everyone gets incredibly excited about pension recycling, but in practice virtually nobody has ever been 'caught' by it, possibly because so many people have been scared off! In other words, it seems to be there as a deterrent and as such has pretty much served its purpose.

HMRC can't just 'assume' you are recycling; the onus is on them to prove that you are recycling your lump sum, not on you to prove it isn't. Your explanation is entirely logical and although there's no guarantee it would provide a full defence, it's hard to see HMRC getting too far, or even starting to investigate, particularly if you can show you have used the lump sum to pay towards your mortgage.

Sbee25

Hi Marcon 

Thank you so much for your post, it has re-assured me that I’m not doing anything wrong, simply trying to save for my retirement. And it’s not like we are talking huge amounts either. I guess you’re right in that if they did investigate, I would have the evidence to prove that it hadn’t come from my lump sum. 

Thank you again for taking the time to respond 😊

NannaH

My husband has no choice in receiving his Forces pension at 60, lump sum will go into an ISA,  the rest will be going straight into his Sipp, especially as he will likely be a higher rate tax payer. 

Sbee25

Hi NannaH

Thank you for your comments. It’s good to know others are in a similar situation and investing for their futures accordingly. Can I ask if your husband took any financial advice before making this decision? I’m interested to know what the professionals think.

Thank you for taking the time to help me with my query. 

Marcon

Sbee25 said:

Hi NannaH

Thank you for your comments. It’s good to know others are in a similar situation and investing for their futures accordingly. Can I ask if your husband took any financial advice before making this decision? I’m interested to know what the professionals think.

Thank you for taking the time to help me with my query. 

If you mean 'what the professionals think' in relation to recycling, they are in much the same position as MoneyHelper - they have to flag the issue because it's there, and are never going to give you a 100% guarantee that you won't be caught by the legislation. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 (and note the emphasis on lump sums, not on contributions made out of ongoing pension payments), from which the following is extracted. 

When does the recycling rule apply?

Paragraph 3A Schedule 29 Finance Act 2004

The recycling rule applies in respect of all pension commencement lump sums paid on or after 6 April 2006, where those lump sums are used as part of a recycling device, regardless of when the significantly increased contributions are actually paid. The recycling rule applies when all of the following conditions are met:

• the individual receives a pension commencement lump sum
• 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. Further guidance about what is a significant increase in contributions is at PTM133830
• the additional contributions are made by the individual or by someone else, such as an employer
• the recycling was pre-planned. Further guidance about determining whether the recycling was pre-planned is at PTM133820

• the amount of the pension commencement lump sum, taken together with any other such lump sums taken 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. Further guidance about the cumulative basis of the recycling rule is at PTM133830

It should be noted that very few lump sum payments will be affected by this recycling rule. Pension commencement lump sum payments will not be caught if they are paid as part of an individual’s normal retirement planning.

Pat38493

Sbee25 said:

I have a final salary pension and want to take my pension and tax free lump sum now at age 55. The lump sum is to pay towards my mortgage. I still need to continue in full time employment. As I will then in effect have two incomes, one from my employment salary and the other from my final salary pension, I wanted to make higher DC Contributions into my DC pension directly from my salary. Having spoken to MoneyHelper, I've been advised that this could be considered as 'pension recycling' and so I could be penalised with a tax penalty as they would assume the higher payments were coming from my lump sum, which they won't be. I will just have more income and so would like to save more towards my pension. Has anyone else heard of this, and is there a way around it if I can prove that the contributions are not coming from my lump sum? 

This is not directly related to your question on recycling but have you taken any general advice on your strategy?  You don't give any figures or further details so it's hard to tell - this may not be the best strategy for you depending for example on various factors like what is the normal retirement age on your final salary pension, what are the reductions for taking it early, what are the numbers involved, your income and current marginal tax rate etc.

As far as I understand, the numbers  involved could also be relevant for your question about risk of recycling as well.

Sbee25

Thank you Marcon that was very helpful