Pension recycling rules

smellogs

Suppose I contribute £40000 per tax year in to my pension fund ( maximum allowed contribution) . In theory surely I could crystallise £40000 per annum and take £10000 tax free per annum. As there is no increase in contributions then surely  I would not fall foul of the recycling rules. Or am I missing something? I am aware that you can draw down 30 k per annum and take £7500 tax free without breaking the recycling rules

NedS

Correct, your contributions would have to increase by more than 30% of what may have been expected for recycling to have occurred. This is determined over a 5 year period including the current tax year, two subsequent tax years and the two prior tax years, so as long as you contributed £40k/year for those 5 years it would not be recycling.

I like the flowchart on this page which explains the rules very clearly:

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

zagfles

You could, but why would you want to?

You would need to have earnings of at least £40k after any contributions to your workplace scheme otherwise you'll exceed the tax relief limit, and you can't take any taxable income from the pension otherwise you'd trigger the MPAA

smellogs

Thank you for your replies. As a self employed person , who unfortunately has to rely on a SIPP, it could be an option.

zagfles

NedS said:

Correct, your contributions would have to increase by more than 30% of what may have been expected for recycling to have occurred. This is determined over a 5 year period including the current tax year, two subsequent tax years and the two prior tax years, so as long as you contributed £40k/year for those 5 years it would not be recycling.

I like the flowchart on this page which explains the rules very clearly:

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

So OP would need to pay in £40k for a few years without taking any TFLS before starting to take it. Otherwise the first time he/she does it could be recycling.

smellogs

Zagflies, thank you for your reply. It is confusing how many years HMRC consider a ‘few’ years. I think it is more than the 5 year period NedS refers to. 

Audaxer

smellogs said:

Zagflies, thank you for your reply. It is confusing how many years HMRC consider a ‘few’ years. I think it is more than the 5 year period NedS refers to. 

Accordingly to the guidance, the 5 year period covers the tax year when the tax free lump sum is taken and the two tax years before and two tax years after that tax year.

In your example is it only the tax free amount you are talking about drawing down?

smellogs

Audaxer, thank you for your reply. Yes only the tax free amount. Basically, I am looking to move and may need to access my Sipp, taking a lump sum. When reading the rules, it states that as long as you take no more than £7500 in any 12 month period then the rules aren’t broken. It then struck me that (if I am interpreting the rules correctly) , that you could take more than £7500 so long as your contributions don’t increase by more than 30%. What isn’t clear to me, is how many years of contributions HMRC look at to do the calculation. 

Mark400

I am paid a bonus of circa £15k every March, and I have always had this in my pay packet but taxed at 40%. Most of my colleagues pay their bonus straight into their pension,  and I think I'll do this for the forseeable future, which as a 60 year old might not be that long ! My employer and I also pay in a total of £700 per month currently.
If I do this, would I then not be able to draw down say £25k of a £100k pot at some point in the next couple of years, falling foul of the recycling rule ?
We need a rethatch of the cottage but cannot predict when the Ukrainan reed will become available.