Another recycling question

Pat38493

Just checking this, but in the following scenario I believe this would not be recycling according to the current guidelines?

- Let's say someone has salary 100K and they are paying about 40K into the pension each year during the last 2 tax years.
- They then, in the run up to retirement, reduced their working hours to part time working, so earning much less, but massively increase the % pension contribution so that the total pension contributions are roughly the same 40K per year (and to join 20% tax rate on current income).
- They took some tax free cash out of the pension to cover additional required spending patterns in the 2-3 following years running up to retirement.where spending is higher than in the years after full retirement.

As the actual amount being put into the pension hasn't increased by 30% (in fact it didn't increase at all), this would not be flagged as pension recycling, right?

Linton

The wording in the tax manual is:

because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be. 

So it not being an actual increase does not appear to help you.

As has been said before there is no documented evidence of how HMRC would treat real-life examples of possible recycling so it is up to you to interpret it how you wish.    I look forward to seeing the results of the test case😊  .


PS: Perhaps a better argumenmt could be that you are not doing this for the purpose of recycling but rather to get the maximum into your pension for your imminent retirement.  Recycling is an unavoidable side effect.  However no-one knows for sure.

Scot_39

Pat38493 said:

Just checking this, but in the following scenario I believe this would not be recycling according to the current guidelines?

- Let's say someone has salary 100K and they are paying about 40K into the pension each year during the last 2 tax years.
- They then, in the run up to retirement, reduced their working hours to part time working, so earning much less, but massively increase the % pension contribution so that the total pension contributions are roughly the same 40K per year (and to join 20% tax rate on current income).
- They took some tax free cash out of the pension to cover additional required spending patterns in the 2-3 following years running up to retirement.where spending is higher than in the years after full retirement.

As the actual amount being put into the pension hasn't increased by 30% (in fact it didn't increase at all), this would not be flagged as pension recycling, right?

The check is I beleive on actual value (£s gross I guess in simple case of DC contribution) the % income doesnt come into it.

The actual test examples read uses iirc a 5 year window - but more debate on historic base period.

And the test is triggered by one of 5 or 6 conditions -

one of which is intent,

one of which is £7500 lump sums less than 12m apart

one of which is 30% in any one tax year vs historic if fixed (but variable historic - say everything above the 40% tax band - and you get a bonus and stuff that in for same reason - excluded regardless - it doesn't count as an increase)

one of which is accumulative 30% of old over 5 years  - which might catch more poeple in theory. But there is a second check re it also being > 30% of lump sum.

So for every £1000 fixed historic annual contribution, if I understand it - could pay £1300 every tax year - as long as took a minimum of £1500/0.3 = £5000 in lump sum. As that passes 30% and 30% accumulative by example 4 regardless.  Scale appropriately.

the 30% annual - based on 30% here

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830

There are HMRC examples at

ex when might

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850

ex when not - inc the 30% cummulative case

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133860

Or just take £7500 every 12 months (was it every or or was it over 12m ?) and again not trigger it.

Pat38493

Scot_39 said:

And the test is triggered by one of 5 or 6 conditions -

one of which is intent,

one of which is £7500 lump sums less than 12m apart

one of which is 30% in any one tax year vs historic if fixed (but variable historic - say everything above the 40% tax band - and you get a bonus and stuff that in for same reason - excluded regardless - it doesn't count as an increase)

one of which is accumulative 30% of old over 5 years  - which might catch more poeple in theory. But there is a second check re it also being > 30% of lump sum.

So for every £1000 fixed historic annual contribution, if I understand it - could pay £1300 every tax year - as long as took a minimum of £1500/0.3 = £5000 in lump sum. As that passes 30% and 30% accumulative by example 4 regardless.  Scale appropriately.

Based on this description, this would mean that the situation I described would not be considered significant enough to attract attention from HMRC.  However as Linton pointed out, the guidelines are a bit vague as there is some phrasing that implies that this would be, but then the conditions above mean that you can do this recycling as long as you don't breach these situations, but even then I think they use some qualifying words like "normally" so they deliberately leave it open to several interpretations.

There is also nothing in the guidelines that unambiguously says whether the 30% increase is 30% of the total gross pension contributions paid in, or 30% of the employee funded contributions if there are company contributions as well.

Anyway - my impression from other threads is the HMRC doesn't really track how much money we are all putting in to our pensions in any automated or systematic way - they only really track what we are taking out via the PAYE system and what LTA was used, so I suspect that they would have to investigate you specifically to see what was going on.  

Actually it's not even clear to me whether HMRC are routinely informed if you take a tax free cash sum out of your pension - they only can assume that when they are notified that you used a portion of your LTA?

For example I paid more than 40K into my pension in each of the last 2 years and nobody from HMRC has contacted me to ask me for my rollover situation or anything.

Of course if they did decide to put in a robust enforcement system, there is nothing to stop them going back multiple years checking compliance and issuing penalties going back quite a few years.

Furthermore the question of intent would be very hard to prove in court unless it was extremely blatant and there was a paper trail showing intent.  For example in the case I outlined, the primary motivation might be to get as much money into your investment pot as possible due to impending retirement, and to only pay 20% tax on your actual income for that year.

Audaxer

The following text is from this gov.uk page:
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)

"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."

As in your example there is no increase in the amount of the contributions, I don't think recycling applies. 

Pat38493

Audaxer said:

The following text is from this gov.uk page:
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)

"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."

As in your example there is no increase in the amount of the contributions, I don't think recycling applies. 

Seems so - a clever HMRC lawyer might try to claim that "amount" means the amount relative to the available income but there is nothing in the guidance to imply that.

Based on all the other threads on this and similar topics, my guess is that HMRC doesn't have any clue what pensions we all hold or how much money we are putting in to them - it seems like for the most part the contributions side is an honesty system and/or relies on the pension providers or employers to enforce it! 

HMRC seems to only track things on the PAYE and LTA side on the way out, and then eventually the IHT system.

I would assume that if HMRC were keeping records of all our pension contributions and which pension assets we are holding, all these threads about people receiving letters about missing pensions would not happen because the companies doing this would simply call HMRC and ask for the latest address of that taxpayer who made those pension contributions.  Therefore my conclusion is that HMRC doesn't routinely track this information unless they have a reason to specifically investigate you as an individual. 

Audaxer

Pat38493 said:

Audaxer said:

The following text is from this gov.uk page:
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)

"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."

As in your example there is no increase in the amount of the contributions, I don't think recycling applies. 

Based on all the other threads on this and similar topics, my guess is that HMRC doesn't have any clue what pensions we all hold or how much money we are putting in to them - it seems like for the most part the contributions side is an honesty system and/or relies on the pension providers or employers to enforce it! 

I would have thought as HMRC know how much tax relief is paid, they would therefore know how much money is going in to pensions, to be able to establish for example, whether AA or MPAA limits are exceeded? 

Pat38493

Audaxer said:

Pat38493 said:

Audaxer said:

The following text is from this gov.uk page:
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)

"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."

As in your example there is no increase in the amount of the contributions, I don't think recycling applies. 

Based on all the other threads on this and similar topics, my guess is that HMRC doesn't have any clue what pensions we all hold or how much money we are putting in to them - it seems like for the most part the contributions side is an honesty system and/or relies on the pension providers or employers to enforce it! 

I would have thought as HMRC know how much tax relief is paid, they would therefore know how much money is going in to pensions, to be able to establish for example, whether AA or MPAA limits are exceeded? 

I may stand to be corrected but I am not sure that is the case - I’m sure they know how much was paid in aggregate and they will be doing audits of pension providers, and have data, but my impression is that they are not tracking it by individual NI number or taxpayer - if you look at HMRC it says that it’s your personal responsibility to report it if you exceeded the AA or MPAA - I don’t think it will be automatically detected by them?

In other words if I called HMRC and ask them - can you tell me how much tax releif was paid or claimed in the last x years and by which of my pensions, I don’t think they have that information - at least not in an accessible manner.

Scot_39

And then theirs the employers contribution.

And for salary sacrifice.

I assume that makes any contribution almost invisible to HMRC.  Any variations in compensated gross arguably just overtime or bonus etc etc.

And how I suspect employers get out of paying their 13.8% NI too.

Because it's the lower salary run through tax payroll - for the first year or so - my original salary didn't even appear on payslips.