Will HMRC see this as recycling?

MrBadger1969

I'd like to pick the brains of the assembled experts please! 

I'm on the verge of potentially taking a DB scheme early at age 55. The usual option is a TFLS (£27.5k) and an actuarially reduced pension (£7.6k p.a.), OR a lesser TFLS down to £0 with a boosted pension of £9k p.a.

Q1. Recycling
I'm separately planning to make use of unused AA from the last 3 tax years (£50k total available) to boost my Sipp by (£40k + £10k from the taxman), before the end of this tax year. If I take the DB early (Jan 2024) with the stated TFLS, will HMRC see that as recycling, despite them being separate events? Would a full inverse commutation eliminate that risk? 

Q2. Inverse commutation deal? 
Is the inverse commutation at 4.76% a good deal? The pension in payment will partly increase by CPI and a smaller part by RPI. The scheme rate is based on current gilt yields, so is currently very favourable. 

For context, this DB scheme is just one part of my overall retirement planning; I also have a Civil Service DB (Classic) with a similar value, and a DC pot of £340k increasing by £40k+ contributions p.a., as well as a full SP coming at age 67, and circa £350k in non-pension savings. I also have no mortgage on my house, worth maybe £250-300k. I'm building up an income floor for retirement, starting with this DB scheme, followed by the Classic at 60 and the SP at 67. I'm planning to continue working full/part time for the next 2 years at least - I plan to cease work by 60 at the latest. 

Thanks for reading and in anticipation of any thoughts! 

Mr Badger

greatkingrat

Firstly, are you sure you will earn enough this year to cover the increased contributions? Unused annual allowance is irrelevant unless you have sufficient earnings to make extra contributions. Also if you already paying 40k+ into a DC scheme it sounds like you wouldn't have much, if any, AA to carry forward anyway.

MrBadger1969

Thanks for responding greatkingrat

Aha - perhaps I have misunderstood the rules around the unused annual allowance from previous 3 tax years. From your comment it appears that I'm limited to a maximum contribution of £60k in this tax year, irrespective of the total unused annual allowance.

So if my salary sacrifice is £40k this tax year, then is it correct that I only have a maximum of £20k more that could be added (£16k from me and £4k from the taxman)?

MrBadger1969

Correction to my last comment. From MoneyHelper, it looks like the limit is my earned income this tax year.

greatkingrat

Yes, if your earnings are 60k (pre-sacrifice), then that would be correct.

Pat38493

MrBadger1969 said:

Correction to my last comment. From MoneyHelper, it looks like the limit is my earned income this tax year.

It is two separate things.  You are limited to the amount of earned income you have in the year.

Then there is a separate annual allowance limit of £60K, and it's this one which has carryover.  However you cannot use the carryover if you don't have earned income to cover it.

Question to the other experts here though - if the £40K pension contributions are salary sacrifice, doesn't that mean they are an employer contribution and therefore don't count against the earned income?  However your earned income will be reduced by the amount of the salary sacrifice so it will in the end come to the same limit.

As to the question of recycling, it doesn't feel like recycling to me if you are just in the last year or two before retirement as it's "normal retirement planning".  However HMRC has not really every had any court cases about it so it's not really clear how they enforce this, if at all.  Further, your £40K+ normal annual contributions would be measured over several years and adding an extra £40K in one year might not breach the 30% increase rule as I think they measure it over a number of years - have a read of the HMRC guidelines about it.  

For example, if the situation is that you are going to make the £40K SIPP contribution anyway regardless whether you decide to take the PCLS from the DB pension or not, then it will be impossible for HMRC to prove that this is done with the pre-planned intention to recycle the money.

MrBadger1969

Pat - thanks for your detailed and helpful response.

It appears that I can only add another £20k this tax year (given the £60k limit) - which is what I plan to do anyway, irrespective of my decision regarding the DB TFLS.

With regard to the DB options - I have almost completely decided to sacrifice the whole lump sum for addition index-linked pension income. I think it would be difficult to achieve an above-inflation return for every year from now until death that would make it worthwhile taking the £27.5k instead. I don't have an immediate need or use for the TFLS, given my other non-pension savings pot. In short, the inverse commutation looks like a good deal to me, unless I'm missing something obvious?

Somebody

It's not clear to me whether there are current pension contributions the DB scheme mentioned or a DC scheme.  If a DB scheme then the Annual Allowance is complicated by the Pension Input Amounts to the DB scheme, which is not a reflection of the contributions paid by the OP.  

MrBadger1969

DB scheme is currently deferred; benefits in that DB stopped several years ago. 

MrBadger1969

I mean contributions stopped when the scheme closed several years ago.