Query re paying tax-free retirement lump sum into Stakeholder

CarterUSM

Hi,

I am considering claiming payment of my deferred pension benefits in a former employer’s defined benefits scheme. Ideally, I would like to maximise the amount of tax-free cash from this scheme, and invest it in my Stakeholder pension plan. I do not intend to claim payment of the benefits from my stakeholder plan until age 65 (I will be 61 in May).

I understand that if I were to transfer the tax-free lump sum directly into my stakeholder plan, I could be liable for a tax charge. Would it be possible for me to avoid any tax charge by having the lump sum paid into another arrangement (e.g. a savings account), and then transferring it into the stakeholder plan?

Thanks in anticipation.

MallyGirl

I am not sure that you can get the lump sum from a DB without claiming the pension

Linton

CarterUSM said:

Hi,

I am considering claiming payment of my deferred pension benefits in a former employer’s defined benefits scheme. Ideally, I would like to maximise the amount of tax-free cash from this scheme, and invest it in my Stakeholder pension plan. I do not intend to claim payment of the benefits from my stakeholder plan until age 65 (I will be 61 in May).

I understand that if I were to transfer the tax-free lump sum directly into my stakeholder plan, I could be liable for a tax charge. Would it be possible for me to avoid any tax charge by having the lump sum paid into another arrangement (e.g. a savings account), and then transferring it into the stakeholder plan?

Thanks in anticipation.

This area is known as "pension recycling" whereby you get a second bite of the tax benefits of a pension by reusing the same pot of money.  Obviously HMRC take a dim view of it.

There are detailed circumstances  that determine whether what you do is to be regarded as recycling and hence liable to tax penalties.

On the other hand as far as anyone seems to know since the legislation was passed about 20 years ago no-one has ever been subjected to these penalties.  Certainly no cases have been brought before the courts.

So up to you.

For light reading have a look at https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and the 6 or so subsequent pages.

dunstonh

and invest it in my Stakeholder pension plan.

Most stakeholder pensions are obsolete compared to modern plans.  (stakeholder charge of 1% for basic funds compares to around 0.3% for similar on modern plans)

I understand that if I were to transfer the tax-free lump sum directly into my stakeholder plan, I could be liable for a tax charge

I don't believe any DB scheme would pay your PCLS directly to a stakeholder pension.   They would pay it to you and then you can choose your payment frequency over the tax year.

Payment method has no impact on the annual pension allowance.    Paying into a pension is all about you meeting the rules for the contribution being paid over the tax year.

Marcon

CarterUSM said:

Hi,

I am considering claiming payment of my deferred pension benefits in a former employer’s defined benefits scheme. Ideally, I would like to maximise the amount of tax-free cash from this scheme, and invest it in my Stakeholder pension plan. I do not intend to claim payment of the benefits from my stakeholder plan until age 65 (I will be 61 in May).

I understand that if I were to transfer the tax-free lump sum directly into my stakeholder plan, I could be liable for a tax charge. Would it be possible for me to avoid any tax charge by having the lump sum paid into another arrangement (e.g. a savings account), and then transferring it into the stakeholder plan?

Thanks in anticipation.

Transfers between pension schemes don't normally give rise to tax charges - but you'd have to transfer the whole of your DB benefits (unless your DB scheme offers partial transfers, which is rare).

There's nothing to stop you taking a tax free lump sum from your DB scheme (and as mentioned above, you'd need to start taking your DB pension) and investing it where you please. Pension recycling is all about recycling lump sums, not the regular pension payments you'd be receiving from your DB pension, so if you're bothered about being 'caught' by the recycling rules, possibly drip feeding amounts equal to the DB pension payments might solve the issue?

CarterUSM

Thank you for your replies to date, and I have taken them into account. Just to confirm, I am aware that it’s not possible to receive the tax-free lump sum at a different time from the date of commencement of the pension. Also, I do not want to effect a transfer value payment representing the total value of my deferred pension benefits, to the stakeholder. I am only interested in paying the tax-free cash lump sum from the occupational scheme, when those benefits come into payment.

Upon further reflection and investigation, I have a few more queries as follows:

Presumably, if I pay £7.5k of the PCLS into my stakeholder plan, there will be no issues regarding this payment (as it will be within the recycling threshold for tax-free cash).

I assume I could be liable to a tax charge on the recycled amount, if any total payments from the PCLS into the stakeholder, for the five years to be assessed (i.e. the tax year in which the tax-free cash is taken, and the two tax years either side) exceeded £9k (i.e. 30% of the PCLS). Is my understanding of this point correct?

Would it be a viable course of action for me to have the rest of the lump sum paid into another arrangement (e.g. a savings account), and then drip-feeding it into the stakeholder from that arrangement? If I were to do this, would the Inland Revenue be able to discover that these additional payments could ultimately be traced back to the payment of the PCLS? 

Alternatively, is there another strategy altogether by which I could reinvest all (or any) of the PCLS into another tax-efficient investment vehicle?

I realise that ultimately I may have to consult an independent financial advisor for clarification of these points.

Very many thanks in anticipation of your assistance.

Linton

CarterUSM said:

Thank you for your replies to date, and I have taken them into account. Just to confirm, I am aware that it’s not possible to receive the tax-free lump sum at a different time from the date of commencement of the pension. Also, I do not want to effect a transfer value payment representing the total value of my deferred pension benefits, to the stakeholder. I am only interested in paying the tax-free cash lump sum from the occupational scheme, when those benefits come into payment.

Upon further reflection and investigation, I have a few more queries as follows:

Presumably, if I pay £7.5k of the PCLS into my stakeholder plan, there will be no issues regarding this payment (as it will be within the recycling threshold for tax-free cash).

I assume I could be liable to a tax charge on the recycled amount, if any total payments from the PCLS into the stakeholder, for the five years to be assessed (i.e. the tax year in which the tax-free cash is taken, and the two tax years either side) exceeded £9k (i.e. 30% of the PCLS). Is my understanding of this point correct?

Would it be a viable course of action for me to have the rest of the lump sum paid into another arrangement (e.g. a savings account), and then drip-feeding it into the stakeholder from that arrangement? If I were to do this, would the Inland Revenue be able to discover that these additional payments could ultimately be traced back to the payment of the PCLS? 

Alternatively, is there another strategy altogether by which I could reinvest all (or any) of the PCLS into another tax-efficient investment vehicle?

I realise that ultimately I may have to consult an independent financial advisor for clarification of these points.

Very many thanks in anticipation of your assistance.

The rules are sufficiently loosely worded so that moving the money around would not protect you from a penallty from recycling.  I believe their purpose  is not to catch minor infringements but rather to warn financial advisors and accountants off being overly creative with recycling on a grand scale.

However there is another get-out-of-jail card.  The recycling rules require that  to be penalised it needs to be shown that you took the PCLS with the objective of recycling the money.  In your case if you are getting PCLS as a side effect of starting your DB pension you may be safe.

However no one knows for sure as there is no evidence of exactly how HMRC would actually treat recycling in practice if they ever made serious efforts to check for it.

Albermarle

It has been mentioned already but to be 100% clear on one point.

It is not clear whether you are still in employment or not? When you have the PCLS from the DB scheme in you bank account, you are limited in how much you can add to a DC pension ( a stakeholder type in your case ) by how much you earn.
This is separate from any recycling issues.

MallyGirl

Albermarle said:

It has been mentioned already but to be 100% clear on one point.

It is not clear whether you are still in employment or not? When you have the PCLS from the DB scheme in you bank account, you are limited in how much you can add to a DC pension ( a stakeholder type in your case ) by how much you earn.
This is separate from any recycling issues.

and pension income does not count as earned income

Marcon

CarterUSM said:

Thank you for your replies to date, and I have taken them into account. Just to confirm, I am aware that it’s not possible to receive the tax-free lump sum at a different time from the date of commencement of the pension. Also, I do not want to effect a transfer value payment representing the total value of my deferred pension benefits, to the stakeholder. I am only interested in paying the tax-free cash lump sum from the occupational scheme, when those benefits come into payment.

Upon further reflection and investigation, I have a few more queries as follows:

Presumably, if I pay £7.5k of the PCLS into my stakeholder plan, there will be no issues regarding this payment (as it will be within the recycling threshold for tax-free cash).

I assume I could be liable to a tax charge on the recycled amount, if any total payments from the PCLS into the stakeholder, for the five years to be assessed (i.e. the tax year in which the tax-free cash is taken, and the two tax years either side) exceeded £9k (i.e. 30% of the PCLS). Is my understanding of this point correct?

Would it be a viable course of action for me to have the rest of the lump sum paid into another arrangement (e.g. a savings account), and then drip-feeding it into the stakeholder from that arrangement? If I were to do this, would the Inland Revenue be able to discover that these additional payments could ultimately be traced back to the payment of the PCLS? 

Alternatively, is there another strategy altogether by which I could reinvest all (or any) of the PCLS into another tax-efficient investment vehicle?

I realise that ultimately I may have to consult an independent financial advisor for clarification of these points.

Very many thanks in anticipation of your assistance.

Consulting an IFA won't help you much in terms of clarification, since they will of necessity have to point you towards the rules but (like everyone else, including people on this board) won't be able to give you any idea of 'how likely' you are to fall foul of HMRC's rules. There are no statistics about how often this sanction has been 'successfully' applied by HMRC; whenever a Freedom of Information request has been submitted, the response is that the cost of finding the answer would be disproportionate because it would require each case to be investigated individually (i.e. HMRC has no stats on this).

Worth reading:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133820 and go to the second paragraph. Reassuringly, the onus is on HMRC to prove your intention, not vice versa.

Pat38493

Marcon said:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133820 and go to the second paragraph. Reassuringly, the onus is on HMRC to prove your intention, not vice versa.

Legally I guess the interesting question is whether this means the rules are unenforceable unless you are a complete idiot and leave bit posters around saying that you are planning to recycle your pension.

In the end if you claim that the additional contributions were simply a side effect of your original motivation, or come up with any other random reason e.g. "I believe that the government is going to remove the right to the tax free cash so I wanted to take it out right away".  If the onus is on HMRC to prove that you did it intentionally I'm wondering how they would prove that in court. 

Would this type of case be judged to criminal standards (beyond reasonable doubt) or on balance of probabilities?