Pension recycling?

dashnine

I’m taking a pre-retirement Tax Free Lump Sum of £30K from my defined contribution pension to contribute to a house deposit (£200K total)  and improvements to the new house. I am currently a higher tax rate payer.

I’m planning an interest only mortgage of £100K, but intend to increase my pension contributions from 10% to 28% of basic salary via salary sacrifice.  This increase is saving for the repayment of the mortgage capital, the intention being to withdraw the capital from the pension and pay off the mortgage capital when I have retired and pay tax at a lower rate.

Would this be considered pension recycling by HMRC?

tacpot12

I think that HMRC could make the case that this is pension recycling. Have a read of this factsheet: 
https://www.hl.co.uk/__data/assets/pdf_file/0005/45428/Recycling_Factsheet.pdf

I think that if you consider the five bullet points in the first part of the text you will see that all of these apply to your proposal. The second bullet point seems the unfairest in your situation, but I don't see how you can argue that taking the PCLS did not result in you making greater contributions to your pension. (If you used the PCLS for something other than a deposit, yo would NOT need to make greater pension contributions). 

The answer is not to have an Interest-Only mortgage. Have the PCLS as the deposit and make capital repayments as part of the mortgage payments. 

Linton

I agree with Tacpot12's conclusion that prima facie it looks like pension recycling.  However...

For it to be pension recycling HMRC would need to show that there was pre-planning involved.  In this case the reasons given for the transactions do not include double-dipping on the TFLS and those transactions would still be appropriate even if there was no TFLS.  So the potential pension recycling is a side effect of reasonable financial planning and is not specifically pre-planned.

It surely would be difficult for HMRC to argue that the OP took the TFLS so that he could buy a house on which he could take out an interest-only mortgage so that a reduction in expenditure would permit a decrease in salary so that the employer would pay extra pension contributions (the OP is has salary sacrifice) out of which extra TFLS could be taken.

The problem is that there is no evidence that the pension recycling penalties have ever been imposed and thus they have never been tested in court.  So we dont know what the rules really mean in practice.  Perhaps the OP could help out here with a test case.

It would seem that the main purpose of the pension recycling rules is as a shot across the bows of "clever" financial advisors rather than a serious hindrance to sensible financial planning.