Recycling rules

MK62

Pat38493 said:

pensionpawn said:

Audaxer said:

Organgrinder said:

Does anyone know which lump sum counts with regard recycling?

My total tax free lump sums exceed £7,500 so that meets the criteria for that part. 

But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).

So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?

The page below says it is for the single PCLS. See below:
Pension Recycling | PruAdviser (mandg.com)

"3. the cumulative amount of the additional contributions exceeds 30% of the PCLS

The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above."

As I understand it, someone could get a large PCLS of say £100k shortly after the start of the tax year and assume they could pay increased contributions of £30k. Then they receive a much smaller PCLS of say £10k later in the tax year and are now restricted to only £3k increased contributions. Seems a bit unfair if they have already started paying in the larger increased contributions?

...and just to make it even more confusing we have to determine what is actually meant by additional contributions, which are checked across two tests, and what determines the timeframe. The guidance suggests that this is "contributions above what would normally be expected had the TFLS had not been taken". So you could argue if someone was salary sacrificing 10% 2 years prior to taking their TFLS(s) then they can safely increase their contributions to 12.99% regardless of what amount was actually withdrawn. The guidance suggests that salary increase would not adversely impact the 30% uplift test, however can I be so sure that a voluntary reduction in hours / salary would also not adversely impact the uplift test. For example would HMRC attempt to argue that Joe Bloggs's reduction of hours was part of his "Baldrickesq" plan to "buy space" to then increase his contributions to the level (in £'s) that he was contributing two years (i.e. the level of contributions he had prior to the TFLS been taken) previous PLUS another 30%? My head is on fire.... Then there's the timeline. I took two TFLS's four weeks apart in two different tax years: 20/21 & 21/22. If the total payments against TFLS value test is made against the later TFLS that implies that the 5 year tax year window is: 19/20 - 23/24 and not 18/19 - 22/23 which is important to confirm as no doubt contributions will be maxed out after the 5 year window! If the timeframe is measured against the first TFLS then my 5 year window ended in March and I can max out this year, unless the sub £7k5 TFLS in the 22/23 tax year further complicates matters (brain explodes...)

Well good luck getting any clarification on those points - posts on other threads in the past have indicated that there have never been any court cases about this topic, nobody on these boards has ever encountered anyone who has actually been penalised or even challenged by HMRC about it, and I think they said that some IFAs had even tried to make freedom of information requests to HMRC to try to find out how many people paid a penalty for pension recycling in the past and HMRC said it would be "too cumbersome" to retrieve the information.

Hence why my suspicion is that HMRC don't enforce this at all unless you are blatantly abusing it - for example by taking the TFC on Monday, paying it all back in on Tuesday, taking your next TFC on Wednesday etc.

You could well be right on that, and HMRC might only be interested in those who are blatantly taking the proverbial, but only HMRC know for sure - it could be that they are so swamped with other stuff that this has been put on the back burner for all but the cases mentioned......if it even stretches to those. That said, these recycling "rules" exist, so it's up to each to decide whether to risk any possible breaches of them.......though the problem might be knowing what exactly constitutes a breach.......perhaps even HMRC themselves don't know for sure in many cases......

DT2001

Organgrinder said:

Does anyone know which lump sum counts with regard recycling?

My total tax free lump sums exceed £7,500 so that meets the criteria for that part. 

But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).

So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?

Two questions :-
1. Can you show why you took the tax free lump sums i.e. what were your plans
2. If you were planning to recycle then you would have read the rules and taken the larger lump sum later so HMRC would have more difficulty proving pre planning?

Organgrinder

Sorry been away. My plans were simply that both schemes offered a very generous commutation factor of 21 which allowed me to invest money in isas and savings plans at a better interest rate than my mortgage. The amount I plan on putting into a pension is less than the disposable income I had prior to taking the lump sums.

Organgrinder

Update......my total contributions including my employers have been over £16,000 pa over the last 3 years. This year therefore I can safely put 30% of this amount without any potential recycling issue. This solves any potential problem.

Thank you everyone who posted.

Organgrinder

Further update.

I am indeed an idiot. All this fretting about pension recycling and it's all so basic when I think about it.

I'm not retiring....I'm going part time and taking some of my pensions early.

This actually increases my take home pay by £400 a month.

I've not used my lump sums to increase my income at all. They are all safely invested and will remain so for the next 3 tax years at least.

Any increase to my pension contributions is out of the increase in my take home pay. In other words all part of normal pension planning and therefore HMRC accept that people will want to boost their pension savings and maximise their pension benefits by funding additional contributions from their salary etc, just so long as it's not from the lump sum either directly or indirectly.

Albermarle

MK62 said:

Pat38493 said:

pensionpawn said:

Audaxer said:

Organgrinder said:

Does anyone know which lump sum counts with regard recycling?

My total tax free lump sums exceed £7,500 so that meets the criteria for that part. 

But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).

So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?

The page below says it is for the single PCLS. See below:
Pension Recycling | PruAdviser (mandg.com)

"3. the cumulative amount of the additional contributions exceeds 30% of the PCLS

The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above."

As I understand it, someone could get a large PCLS of say £100k shortly after the start of the tax year and assume they could pay increased contributions of £30k. Then they receive a much smaller PCLS of say £10k later in the tax year and are now restricted to only £3k increased contributions. Seems a bit unfair if they have already started paying in the larger increased contributions?

...and just to make it even more confusing we have to determine what is actually meant by additional contributions, which are checked across two tests, and what determines the timeframe. The guidance suggests that this is "contributions above what would normally be expected had the TFLS had not been taken". So you could argue if someone was salary sacrificing 10% 2 years prior to taking their TFLS(s) then they can safely increase their contributions to 12.99% regardless of what amount was actually withdrawn. The guidance suggests that salary increase would not adversely impact the 30% uplift test, however can I be so sure that a voluntary reduction in hours / salary would also not adversely impact the uplift test. For example would HMRC attempt to argue that Joe Bloggs's reduction of hours was part of his "Baldrickesq" plan to "buy space" to then increase his contributions to the level (in £'s) that he was contributing two years (i.e. the level of contributions he had prior to the TFLS been taken) previous PLUS another 30%? My head is on fire.... Then there's the timeline. I took two TFLS's four weeks apart in two different tax years: 20/21 & 21/22. If the total payments against TFLS value test is made against the later TFLS that implies that the 5 year tax year window is: 19/20 - 23/24 and not 18/19 - 22/23 which is important to confirm as no doubt contributions will be maxed out after the 5 year window! If the timeframe is measured against the first TFLS then my 5 year window ended in March and I can max out this year, unless the sub £7k5 TFLS in the 22/23 tax year further complicates matters (brain explodes...)

Well good luck getting any clarification on those points - posts on other threads in the past have indicated that there have never been any court cases about this topic, nobody on these boards has ever encountered anyone who has actually been penalised or even challenged by HMRC about it, and I think they said that some IFAs had even tried to make freedom of information requests to HMRC to try to find out how many people paid a penalty for pension recycling in the past and HMRC said it would be "too cumbersome" to retrieve the information.

Hence why my suspicion is that HMRC don't enforce this at all unless you are blatantly abusing it - for example by taking the TFC on Monday, paying it all back in on Tuesday, taking your next TFC on Wednesday etc.

You could well be right on that, and HMRC might only be interested in those who are blatantly taking the proverbial, but only HMRC know for sure - it could be that they are so swamped with other stuff that this has been put on the back burner for all but the cases mentioned......if it even stretches to those. That said, these recycling "rules" exist, so it's up to each to decide whether to risk any possible breaches of them.......though the problem might be knowing what exactly constitutes a breach.......perhaps even HMRC themselves don't know for sure in many cases......

It has been mentioned in previous threads that the rules were brought in, in response to 'industrial scale abuse'.
No idea what this means exactly,  but presumably some organised mass recycling by some dodgy players.