Recycling Question

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, which is then not taxed, 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.

Marcon

Mark400 said:

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, which is then not taxed, 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.

If you have an established pattern of contributions (in your case paying in your bonus) and then draw down a lump sum, it's highly unlikely this would be challenged. That splendidly vague generic statement is based on the fact that HMRC can't give any figures on how many times they have endeavoured to prove recycling has taken place - but I have yet to see hard evidence of anyone who has been 'caught' by the rules. HMRC themselves say 'very few people will be affected'.

There's plenty of info on the internet, but this is probably as relevant/helpful as any: https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pensions-recycling

Pipthecat

Unless I'm misunderstanding your question, Recycling would not apply as you plan on spending the UFPLUS (tax free cash).  Recycling rules would only be an issue if you decide to reinvest the tax free £25k back into a pension.  HMRC could then look at whether your contributions have been significantly increased.  The idea being that you should not be able to recycle your £25k into £31k with tax relief.

If you plan on taking the tax free cash and continue making pension contributions then you need to be aware of the HMRC rules

Steve182

To avoid falling foul of recycling rules I think you would need to pay the £15K into a pension regularly for several years (>2) before taking the TFLS.

My own interpretation of the rules is that any increase in contributions within the 5 year measured period (starting 2 years before TFLS) will be compared with historic contributions during the years preceding that period, and any increase in any of those 5 years used to determine whether a significant increase has occurred on a cumulative basis.

"What is the cumulative basis on which the significant increase of contributions is based?

An individual planning to increase contributions significantly to a registered pension scheme when taking a pension commencement lump sum does not avoid the ‘significant increase’ test by increasing contributions piecemeal or gradually over time. It does so by providing for contributions to be measured over a set period of time in determining whether or not there has been a significant increase in contributions.

The period of time is:

• the tax year in which an individual takes a pension commencement lump sum with the intention of using it to make significantly increased contributions to a registered pension scheme
• the 2 tax years immediately preceding the tax year in which the individual took the lump sum
• the 2 tax years immediately following the tax year in which the individual took the lump sum."

If you then look at the example below it's clear that HMRC look back a lot further than 2 years to determine what the normal level of contribution would be -

"Illustration of a significant increase in contributions

A member’s annual contributions to registered pension schemes have been £20,000 a year for the last 10 years. In the year in which a pension commencement lump sum is received, the contributions are £30,000. The member took the lump sum with the prior intention of using it to make significantly greater contributions to a registered pension scheme.

Based on the previous 10 years, the amount of contributions that might have been expected is £20,000. So, there is a significant increase in contributions as the increase of £10,000 is more than 30% of the amount that would have been expected in that year (the limit is reached where the amount of the increase in contributions - £10,000 - exceeds £20,000 x 30% = £6,000)."

In the next example they also refer to "10 years"

"Illustration of the cumulative basis

In the tax year (year 1) in which a pension commencement lump sum of £35,000 is received by a scheme member, who intended to use that lump sum to increase contributions to a registered pension scheme, the contributions to registered pension schemes relating to that member increase from the previous 10 years’ annual contributions of £10,000 to £10,500 - as it is an increase of 5%, the amount by which the contributions have increased in that year is not a significant increase.

In the following tax year (year 2) the contributions increase to £11,000 - an increase of 10% on the usual contributions of £10,000 for that year (the amount of annual contribution that would have been expected before the payment of the lump sum). This is not a significant increase as the £1,000 increase in itself is less than 30% of the usual annual contributions and the £1,000 increase and the increase in year 1 together do not exceed the 30% limit (year 1 increase of £500 plus this year’s increase of £1,000 = 15% of the amount of usual annual contributions of £10,000 for year 2).

In the next following tax year (year 3), contributions increase to £12,000 - an increase of 20% on the usual contributions of £10,000 for that year (the amount of annual contribution that would been expected before the payment of the lump sum). This is now a significant increase in contributions as, cumulatively, the amount of the increase - £3,500 - is more than 30% of the amount of contributions that might be expected in that year (year 1 increase of £500 + year 2 of £1,000 + this year’s of £2,000 = 35% of the usual annual contributions of £10,000).

However, the recycling rule is not triggered as the significant increase in the member’s contributions - £3,500 - does not exceed 30% of the amount of the pension commencement lump sum (lump sum of £35,000 x 30% = £10,500).

RPI is not required because the ‘current value’ of contributions was £10,000."

Albermarle

Recycling would not apply as you plan on spending the UFPLUS (tax free cash)

To avoid confusion, normally the tax free cash lump sum is referred to as TFLS. sometimes as PCLS ( pension commencement lump sum ) , especially for DB schemes.

UFPLS ( no U ) is a payment from a DC pension, that is 25% tax free and 75% taxable. This may include all the available tax free cash . or just part of it.

Steve182

As I see it the OP cannot increase his contribution cumulatively by more than 30% above historic levels, or spend more than 30% of TFLS on pension contribution increases, measured over 5 years, beginning 2 years before TFLS was taken.

Calculation based on 30% of TFLS -

If he increased contributions same year as TFLS taken then max would be £25K X 30% /3 years = £2.5K/year

If he increased the contributions 2 years before TFLS and continued for 5 years it would be £25K X 30% / 5 years = £1.5K/year

Scot_39

Steve182 said:

As I see it the OP cannot increase his contribution cumulatively by more than 30% above historic levels, or spend more than 30% of TFLS on pension contribution increases, measured over 5 years, beginning 2 years before TFLS was taken.

Calculation based on 30% of TFLS -

If he increased contributions same year as TFLS taken then max would be £25K X 30% /3 years = £2.5K/year

If he increased the contributions 2 years before TFLS and continued for 5 years it would be £25K X 30% / 5 years = £1.5K/year

Deleted my old comment @Mark400 - please ignore if read it and accept my apologies.

It's getting very late now - but been trying to wrap my non-tax accountant head around your examples and a few more on the HMRC site itself - under the PTM examples.

OK - so it's not 2 years to establish the base - it's a 5 years window for the tests

- to establish absolute deviation from the long term base contribution (fixed or consistent basis like n% salary reading other examples from HMRC). 

- and the 30% cumulative against lump sum over those five years.

Think can get that now.

But now grappling with your 1st line

Why do you think it's 30% cumulatively for the % of historic contribution ?

I read that as instant annual limit - as making it cumulative seems to contradict the £3500 in second example - thats 35% of base contribution so is classed as a significant increase - in the second example - but then the secondary cumulative condition - based on 30% of lump sum says that would override the significant increase test - and so no recycling rule trigger ?

So any one year would instantly trigger the 30% of historic condition.  (The example is in the actual year - but any of the 5 ?)

And the second example - stops anymore than 30% of lump sum being averaged in over the full 5 years.

That 1st 30% instant certainly seems a very tough test to comply with.

But thats what it's designed to do I guess.

My own pension contributions used to be all over the place - when was working full time - I used to pay in few bonuses we got and all significant overtime (to avoid 40% tax).  I wonder if that would have passed as a consistent basis test if took a lump sum soon after.  Edit : paying to avoid a higher band is permitted in ptm133860 ex 2.

Seems strange one is based on 30% of old contribution level - and the other in part based on the lump sum taken if you haven't violated that - but that's tax for you.

So mixing the two examples

at nominal £1000 personal pa historic contribution - could you in theory pay in extra £300 per year - and so not trigger the more than 30% cf historic-from 1st example

- and

as long as took c1500/.3 minimum out in lump sum in middle = £5000 - this would allow it to pass regardless - as less than the 30% of lump sum cumulative test in second example (or of course took nothing - so need for the test ) ?

I am struggling with this - as I was looking to take a lump sum early in next tax year.

Scot_39

Marcon said:

Mark400 said:

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, which is then not taxed, 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.

If you have an established pattern of contributions (in your case paying in your bonus) and then draw down a lump sum, it's highly unlikely this would be challenged. That splendidly vague generic statement is based on the fact that HMRC can't give any figures on how many times they have endeavoured to prove recycling has taken place - but I have yet to see hard evidence of anyone who has been 'caught' by the rules. HMRC themselves say 'very few people will be affected'.

There's plenty of info on the internet, but this is probably as relevant/helpful as any: https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pensions-recycling

The issue is that he currently isn't - he is taking it and paying the tax.

So he has an established profile - but it's his share of the £700 pcm /£8400 pa - not the more significant £15k bonus.

But I take your point regarding the lack of definite enforcement evidence.

Audaxer

Scot_39 said:

Why do you think it's 30% cumulatively for the % of historic contribution ?

PTM133830 - Unauthorised payments: deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: significant increase in contributions and cumulative basis - HMRC internal manual - GOV.UK (www.gov.uk)

In the page above it says:
"The amount of additional contributions is measured on a cumulative basis to determine whether or not a significant increase has occurred."

Scot_39

How does / could the hmrc establish the intent to recycle ?

In a situation like the op, it is surely natural to look to maximise the pension pot ahead of retirement. And avoid excess taxation on that bonus income.  As he is aware is a normal practice in his work place.

He is clearly paying in money ahead of the lump sum - by a number of years.  So not like he is using the actual lump sum itself.

(Could - would hmrc argue he had borrowed from himself knowing he was taking the lump sum at some indeterminate time in future ? )

The section on intent - I.e. preplanned is a bit woolly.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133820

Take the money to increase and then increasing is preplanned.
Taking the money then deciding to increase is not.
And the hmrc has to prove the difference in intent.  REALLY ?

As there is also a min lump sum threshold test, by lifting the amounts in 7.5k chunks every 12m arguably, any
contributions changes are never tested for recycling. 

Steve182

It is extremely confusing, particularly the relevance of the 2 year period before the TFLS is taken, which some may (incorrectly IMO) interpret as being used to establish a benchmark for historic contributions.

I can see why HMRC include contributions 2 years either side of TFLS in their recycling test. People would just borrow money from their parents, savings, redundancy settlements or wherever to increase contributions during those 2 years preceding the TFLS if they were untested, then reduce contributions back to a normal level following the TFLS to avoid falling foul of the rules.

It would be very helpful if HMRC included some hypothetical examples of this in their guide, ie people increasing payments in the 2 years before the TFLS to show how this would affect the result of the recycling tests.