Recycling Question

Audaxer

Steve182 said:

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. 

This page includes some examples:
Pension Recycling | PruAdviser (mandg.com)

Linton

Scot_39 said:

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. 

No one knows exactly how HMRC will handle particular situations because as far as anyone on the forum seems to know recycling penalties have never been applied.  Only once cases appear and are taken to court will we get definitive rulings.

If you read HMRC documentation (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and subsequent pages you will, I think, get an understanding of what HMRC are trying to achieve.  The two years before and two years after periods are to reduce potential loopholes.  Increasing your contributions 2 years either side of a tax free withdrawal is suspect if pre-planned.

Proving pre-planning could be to assess what reasons are given for the actions.  If there is no other convincing reason for them HMRC may conclude that they were preplanned for the purpose of recycling.    If the person being penalised objects the recourse is the courts.

I think that it is futile to undertake a word by word textual analysis of the rules to establish a way of successfully recycling.  HMRC say that any particular case will be decided on the specific circumstances.  The rules are not enshrined in law, they are merely HMRC saying how they intend to apply the law.  The rules are woolly, perhaps necessarily and/or deliberately so.  The more precise they are the easier it is for someone wishing to recycle to find a loophole.

Steve182 said:

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. 

I share the view that  the normal level of contribution is established in the 2 years prior to taking the lump sum is an incorrect interpretation.  As far as I can see the Tax Rules provide no guidance as to how the normal level will be determined. So they presumably will do it on the basis of the specific circumstances.

Kismet_Hardy

Well, it looks like I am stuffed then. I didn't have a private pension until a couple of years ago and it took me a few months to understand how much tax I could save (yes, I know, I know.....). At that stage, I started paying an additional £1,000 per month into my pension. I have been doing that for about 18 months. 

I am just about to make an election to take a defined benefit pension this summer (I shall be almost 64). There will be a lump sum of around £30,000. I'm intending to put £20,000 of that into an ISA and the rest into premium bonds. However, I had been thinking of putting some extra money into my pension during this financial year as it will probably be the last year when I shall be a higher rate pensioner.

From what you say, not only would me putting extra in be an issue, but paying £1,000 a month in over the last 18 months would be an issue.

Do they not account for the fact that some of us are late developers when it comes to understanding pensions?!   

Apologies, OP, for hijacking the thread.     

Scot_39

Audaxer said:

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."

Yes I read that - but then their specific example overrides it - as posted by Steve182 above. if it doesn't go over 30% of the lump sum taken.

So in hmrc own example the 3500 total by year 3 violates the significant increase cumulatively, but then doesn't violate the 30% of £35000, so no recycling rule triggered.

It's all a little obscure.

And how successful hmrc would ever be at proving intent - or even willing to try - given the difficulty their limited resources have dealing with bigger tax and loan issues - debatable.

Steve182

Kismet_Hardy said:

Well, it looks like I am stuffed then. I didn't have a private pension until a couple of years ago and it took me a few months to understand how much tax I could save (yes, I know, I know.....). At that stage, I started paying an additional £1,000 per month into my pension. I have been doing that for about 18 months. 

I am just about to make an election to take a defined benefit pension this summer (I shall be almost 64). There will be a lump sum of around £30,000. I'm intending to put £20,000 of that into an ISA and the rest into premium bonds. However, I had been thinking of putting some extra money into my pension during this financial year as it will probably be the last year when I shall be a higher rate pensioner.

From what you say, not only would me putting extra in be an issue, but paying £1,000 a month in over the last 18 months would be an issue.

Do they not account for the fact that some of us are late developers when it comes to understanding pensions?!   

Apologies, OP, for hijacking the thread.     

Depending on the level of your contributions prior to the increase 18 months ago It does sound as though you could fall foul of the significant increase rule. I suggest looking at some of the guides to which links have been posted in various replies above and go through all the various recycling tests.

If you are simply taking the DB lump sum to reinvest, could you not just delay this until two full tax years have elapsed since your final year of elevated pension contributions?

I think you could also take out a lump sum of <£7.5K and recycle that into a pension as it's below the threshold (that's my recollection, but double check the guides first)

Kismet_Hardy

Thank you, Steve. 

I have just looked at the private pension and it looks as if I had started to pay in the extra £1,000 in September 2021. I had been intending to take the pension from July of this year, but if I leave it until September, that will mean I have paid in the extra amount for 2 years. So that will make it okay then?

Can I ask - Does it make any difference that I can show that the extra £1,000 has come directly out of the salary which has paid into my account each month? 

Linton

Scot_39 said:

Audaxer said:

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."

Yes I read that - but then their specific example overrides it - as posted by Steve182 above. if it doesn't go over 30% of the lump sum taken.

So in hmrc own example the 3500 total by year 3 violates the significant increase cumulatively, but then doesn't violate the 30% of £35000, so no recycling rule triggered.

It's all a little obscure.

And how successful hmrc would ever be at proving intent - or even willing to try - given the difficulty their limited resources have dealing with bigger tax and loan issues - debatable.

The Tax Manual states...

As a rule of thumb, HM Revenue and Customs accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

I havent seen any reference to a 30% of the lump sum other than in one example regarding Salary Sacrifice .

Audaxer

Kismet_Hardy said:

I am just about to make an election to take a defined benefit pension this summer (I shall be almost 64). There will be a lump sum of around £30,000. 

Under the rules of your DB pension, do you have to take the lump sum, or is it an option to take no lump sum and a higher pension? I'm sure that I read somewhere that if it's a DB pension lump sum that you have to take under the scheme rules, then it can't count towards possible recycling.

Kismet_Hardy

No, I don't have to take a lump sum, but it makes financial sense to take it. I could delay taking it though - up until my 65th birthday if necessary. I'll speak to them tomorrow. Thank you 

Steve182

Kismet_Hardy said:

Thank you, Steve. 

I have just looked at the private pension and it looks as if I had started to pay in the extra £1,000 in September 2021. I had been intending to take the pension from July of this year, but if I leave it until September, that will mean I have paid in the extra amount for 2 years. So that will make it okay then?

Can I ask - Does it make any difference that I can show that the extra £1,000 has come directly out of the salary which has paid into my account each month? 

In reply to your first question - No I don't think that time period will help you avoid or pass the test. 
I believe they will look at your pension contribution for 5 years (starting 2 years before TFLS) and compare that with historic levels BEFORE that period. So elevated contributions in the 2 years immediately prior to TFLS are tested for recycling against a previous benchmark. You would need to wait 2 years after you stopped making elevated contributions before taking TFLS to prevent them from being included in the recycling test

It does not normally matter where the money came from, although there are exceptions for increased contributions due to unplanned events like lottery wins.