Forces pension recycling rules 22 January at 11:07PM in Pensions, annuities & retirement planning 8 replies 247 views

Getting_greyer

Hi, maybe a bit niche but I know some ex-forces on here:

I've been reading a bit on pension income being used to contribute into pension pots. It seems a common discussion on the forum  but I've noticed posters mention recycling rules to be wary of which from my understanding is about using tax free pension to put into a pension pot. My situation as follows:

In a couple of years I will be in receipt of a forces immediate pension at age 40.  I expect to be in full employment whilst collecting this and be a base rate taxpayer.  I suspect the pension would have the relevant tax code so that I receive an equal post-tax monthly amount. I will also be contributing to whatever type of pension scheme my employer would have. 

I was considering to pretty much put my full monthly pension into a DC pot every month- would I fall foul of recycling rules? If I would, it's no great shame, I would just have to spend it on beer instead of wasting it on pension contributions.

Emmia

You don't have to spend it on beer, you could put it into an ISA instead of a pension.

draiggoch

You are not paying in a lump sum just a decent amount from your monthly wage. Many pensioners already do this with no issues. 

Probably a better option depending on employer options is to pay more in to the workplace scheme and living on the armed forces pension.

artyboy

The short answer is that you should not have any issues if you did want to (let's say) increase the amount you pay into your pension by an amount that's broadly equivalent to the additional amount you
might happen to get from your forces pension.

Let's face it, recycling is a rule more honoured in the breach than the observance. If you choose to put more of your earned income into pension and use the forces payment to bridge the gap for your living expenses, how on earth would HMRC ever be able to argue that it was recycling...?

Assuming of course you don't go and open a separate bank account to receive just your forces pension into, give it a nickname of 'pension recycling account' and then directly pay that money into a SIPP, then you'll be fine 

Getting_greyer

artyboy said:

The short answer is that you should not have any issues if you did want to (let's say) increase the amount you pay into your pension by an amount that's broadly equivalent to the additional amount you
might happen to get from your forces pension.

Let's face it, recycling is a rule more honoured in the breach than the observance. If you choose to put more of your earned income into pension and use the forces payment to bridge the gap for your living expenses, how on earth would HMRC ever be able to argue that it was recycling...?

Assuming of course you don't go and open a separate bank account to receive just your forces pension into, give it a nickname of 'pension recycling account' and then directly pay that money into a SIPP, then you'll be fine 

Yeah I was pondering that, if there was a rule against it, if both pension and earnings hit my current account at the same time how would anyone know which has been used. But guess you've answered my question.

Marcon

Getting_greyer said:

Hi, maybe a bit niche but I know some ex-forces on here:

I've been reading a bit on pension income being used to contribute into pension pots. It seems a common discussion on the forum  but I've noticed posters mention recycling rules to be wary of which from my understanding is about using tax free pension to put into a pension pot. My situation as follows:

In a couple of years I will be in receipt of a forces immediate pension at age 40.  I expect to be in full employment whilst collecting this and be a base rate taxpayer.  I suspect the pension would have the relevant tax code so that I receive an equal post-tax monthly amount. I will also be contributing to whatever type of pension scheme my employer would have. 

I was considering to pretty much put my full monthly pension into a DC pot every month- would I fall foul of recycling rules? If I would, it's no great shame, I would just have to spend it on beer instead of wasting it on pension contributions.

This might be a bit more technical than you fancy reading, but even so it's a useful overview: https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash

Getting_greyer

Cheers for the link. Looks like I'll be OK as the monthly pension would be taxed. As long as I have enough pensionable earnings and haven't done that mpaa thing I'll be OK.  

I would also have a tax free lump sum, possibly would be in the wrong to reinvest that but I won't be anyway so no dramas.

Linton

The recycling rules do not apply to taxable income from DB pensions so there would appear  to be no problem for the OP.

Audaxer

Getting_greyer said:

I would also have a tax free lump sum, possibly would be in the wrong to reinvest that but I won't be anyway so no dramas.

If the tax free lump sum was from your DB pension is over £7,500, and the other conditions in the HMRC recycling rules are met, then it could be classed as recycling. See link below for all the conditions which would have to be met before it could be classed as recycling:
PTM133810 - Unauthorised payments: Deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: overview - HMRC internal manual - GOV.UK (www.gov.uk)