Pension Recycling Questions

Pat38493

Couple of questions about the pensions recycling rules.  I have been reading the HMRC guidance on this topic.

All of the guidance documents on the HMRC website seems to refer only to PCLS lump sums.  However I assume this also applies to tax free cash taken from a DC pot?

Secondly, when the guide says that they can check the percent increase of pension contributions to make sure it didn't exceed 30%, would this include all contributions or only personal?

e.g. I am in an an employer scheme - I pay £1000 per month and employer pays £500.  I take a tax free sum from my pension and then I increased my pension payments by £400 per month.  Does this breach the rule or not?

I am specifically thinking about the example if I took out tax free cash to pay off my mortgage, and then increased my pension contributions due to the fact that I don't have to pay the mortgage anymore so I have spare money.

From my reading of the rules, this would be ok as long as either
- The total per tax year increase in contributions doesn't exceed 30% ongoing basis.
- The cumulative increased contributions during the 5 tax years prior and after and including the lump sum date doesn't exceed 30% of the total lump sum amount.

By my calculations on a rough spreadsheet, I could pay off my mortgage, and then pay the entire amount of my mortgage payments into my pension and get HR tax relief on it for 2 years before I breach the second rule above.  If I reduce the additional contributions by a couple of hundred quid, I can stay outside any breach of the rules indefinitely.

(always assuming they don't change the guidelines in the meantime).

The fact that I am doing this quite intentionally doesn't matter as long as I stay within the limits above (under current guidance)?

I haven't done all the maths in detail, but to me it feels like this could be beneficial in the last years before retirement if an HR taxpayer now and BR in retirement as I would get a gain of 20+% tax relief, plus mortgage interest rate avoidance making it close to 25%, which would probably more than outweigh any negatives of this approach.  The main thing is to avoid breaching the pension recycling guide?

This wasn't really an option for me before due to the AA, but it may become an option based on yesterday's headlines.  It might even persuade me to carry on working for an extra year or two.

Linton

 - One error/confusion - the period over which recycling is calculated is 5 years in total - 2 years before the year in which the tax free sum is taken, the year in which it is, and the 2 following years.

 - Another reason why you may not be recycling is if the lump sum taken is £7500 or less.

 - Recycling only relates to your contributions or to personal contributions made on your behalf - eg salary sacrifice.

 - Have you checked whether your employer's pension scheme permits taking a tax free lump sum whilst still contributing? Some do not.

See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133800 and the following pages for the full details.  Anything not covered there you can take as unknown and unknowable as it is believed that HMRC have never penalised anyone for pension recycling, certainly no cases have ever reached the courts.

Pat38493

Linton said:

 - One error/confusion - the period over which recycling is calculated is 5 years in total - 2 years before the year in which the tax free sum is taken, the year in which it is, and the 2 following years.

 - Another reason why you may not be recycling is if the lump sum taken is £7500 or less.

 - Recycling only relates to your contributions or to personal contributions made on your behalf - eg salary sacrifice.

 - Have you checked whether your employer's pension scheme permits taking a tax free lump sum whilst still contributing? Some do not.

See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133800 and the following pages for the full details.  Anything not covered there you can take as unknown and unknowable as it is believed that HMRC have never penalised anyone for pension recycling, certainly no cases have ever reached the courts.

So on the increase in contributions point, you are saying that actually in my example above I have breached that particular rule since my personal contribution (not accounting for the employer contribution which didn’t change) increased by more than 30%?  The total increased amount paid into the pension was less than 30% but if you only look at the amount that I personally selected and controlled, it’s more than 30% in this example.  It’s employer matching up to 7%.

The scheme is salary sacrifice where the employer matches up to 7% plus a share of the NI savings.

Regarding the employer scheme - I have not checked but it’s an Aegon scheme that calls itself a SIPP so I would hope so.  In any case I also have another Aviva scheme which was the old scheme they switched from so I can use (or transfer) that if needed.

The guidance you have linked is the ones I was already looking at.  I am also kind of wondering how HMRC would ever even know if I am doing these things across more than one provider unless someone tipped them off, but I prefer to stay within my understanding of the rules anyway.

Linton

Pat38493 said:

Linton said:

 - One error/confusion - the period over which recycling is calculated is 5 years in total - 2 years before the year in which the tax free sum is taken, the year in which it is, and the 2 following years.

 - Another reason why you may not be recycling is if the lump sum taken is £7500 or less.

 - Recycling only relates to your contributions or to personal contributions made on your behalf - eg salary sacrifice.

 - Have you checked whether your employer's pension scheme permits taking a tax free lump sum whilst still contributing? Some do not.

See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133800 and the following pages for the full details.  Anything not covered there you can take as unknown and unknowable as it is believed that HMRC have never penalised anyone for pension recycling, certainly no cases have ever reached the courts.

So on the increase in contributions point, you are saying that actually in my example above I have breached that particular rule since my personal contribution (not accounting for the employer contribution which didn’t change) increased by more than 30%?  The total increased amount paid into the pension was less than 30% but if you only look at the amount that I personally selected and controlled, it’s more than 30% in this example.  It’s employer matching up to 7%.

The scheme is salary sacrifice where the employer matches up to 7% plus a share of the NI savings.

Regarding the employer scheme - I have not checked but it’s an Aegon scheme that calls itself a SIPP so I would hope so.  In any case I also have another Aviva scheme which was the old scheme they switched from so I can use (or transfer) that if needed.

The guidance you have linked is the ones I was already looking at.  I am also kind of wondering how HMRC would ever even know if I am doing these things across more than one provider unless someone tipped them off, but I prefer to stay within my understanding of the rules anyway.

The Tax Manual says:

Paragraph 3A Schedule 29 Finance Act 2004

One of the conditions for the recycling rule to apply is that there is a ‘significant increase’ in the amount of contributions paid:

• by the member to any one or more registered pension schemes
• on behalf of the member to any one or more such scheme (for example, where the spouse of a member makes contributions on behalf of that member)
• by an employer or employers in respect of the member to any such scheme.

This also includes any combination of the above.

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.

My reading of the inclusion of the wording in bold is that that  HMRC can apply the 30% rule to any one or any combination of those individual types of pension contribution.  So they could reasonably say that your proposed contributions do not meet the <30% requirement.

However only the Fiinance Act words are definitive, you may have a different interpretation.  We will only know for sure if your situation comes up before a judge.

Pat38493

Linton said:

My reading of the inclusion of the wording in bold is that that  HMRC can apply the 30% rule to any one or any combination of those individual types of pension contribution.  So they could reasonably say that your proposed contributions do not meet the <30% requirement.

However only the Fiinance Act words are definitive, you may have a different interpretation.  We will only know for sure if your situation comes up before a judge.

Which kind of illustrates the ambiguity there because when I read that part earlier this morning, I interpreted it the opposite to mean that the total contributions going into all pensions in my name should not increase (cumulatively) but more than 30% (for that one test).