Sanity check on pension recycling rules (mixed DB/DC scheme: USS)

NoMore

I don’t think you will get it in black and white. No doubt they would want to keep it vague in case they do ever decide to go after Individuals. 

As I’ve said before to me it does seem it’s likely to only to stop firms advising this. As every discussion on this comes down  to it’s way too vague and grey to actually prosecute individuals 

NickBFS

jamesd said:

HMRC have previously said that they have never used the rules on an individual and schemes are the target.

I don't think that HMRC have unequivocally stated that they will not use the rules against an individual. Admittedly, the risk might be low but it is not zero.

jamesd said:

Your overall plan seems poor. You take savings with no tax relief to pay off the mortgage when instead you could pay those savings into a pension to get tax relief first. At least a 6.25% gain from the tax free cash if all done at basic rate. Assuming you're 55 you can get the PCLS without triggering the MPAA and promptly use it for the mortgage reducing. Extra contributions from savings or even credit card borrowing now may also mean that they fall outside the five year window.

From 55 you can also use the £7,500 of tax free cash per rolling 12 month period allowance to eliminate part of the issue, removing this from the calculation.

If you have a spouse you can take the tax free cash into a bank account in your name and gift it to them by transferring into theirs. Don't use a joint account. You can do this in advance with the pension contributions if the income tax and possible NI saving are OK. 

I forgot to mention in my original post that I was about 2 years away from retirement, and therefore already within the 5 year window. Anything I do at this stage will be in that window. I would have thought that paying savings into my pension and then withdrawing them from the pension in the same or following tax year to pay off a mortgage would clearly fall within HMRC's definition of pension recycling.

Besides, the DC portion of the USS scheme does not allow flexi drawdown (they only allow UPFLS). I would therefore have to arrange a transfer of my DC pot to a SIPP and pay SIPP charges (these are covered by an employer subsidy in the USS scheme). The latter would not necessarily have been a deal killer. Had I thought about it many years ago, I might have done it but I am a bit late for this so close to retirement now.

I have no spouse.

jamesd said:

Savings to pay off a mortgage would be an obvious thing to do at the end of a mortgage deal with higher interest rate pending and there's no prospect of HMRC acting against such routine sensible use of savings. 

Yes, I thought so and therefore considered that the risk was very low but doing so while concurrently substantially increasing pension contributions is what could conceivably be classified as pension recycling. While the risk is probably very low, it is not zero, hence why I would prefer to remain on the side of keeping the contributions below 30% to bring the risk factor to zero. 

jamesd

ussdave said:

For it to be considered under pension recycling rules you would need to draw a TFLS or PCLS first.

The rules do allow them to treat things like borrowing to make higher contributions then repaying from the PCLS a breach. Doesn't have to be PCLS first. See part of example 3 here:

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

"The recycling rule would also apply if, instead of funding the contribution directly from the lump sum, the individual takes the money that pays the contribution out of the available savings and then uses the £35,000 pension commencement lump sum to replenish those savings. A short-term loan in anticipation of the lump sum to repay it would be treated similarly."

NickBFS

jamesd said:

ussdave said:

For it to be considered under pension recycling rules you would need to draw a TFLS or PCLS first.

The rules do allow them to treat things like borrowing to make higher contributions then repaying from the PCLS a breach. Doesn't have to be PCLS first. 

Indeed. HMRC give an example on this page of their pensions tax manual: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850 (see second paragraph of example 3).

jamesd

Pat38493 said:

jamesd said:

HMRC have previously said that they have never used the rules on an individual and schemes are the target.

Do you have any source for your first statement in bold?  I’ve seen plenty of posts saying that it’s been kind of hinted by HMRC that this is the case, but I haven’t seen anything concrete that they definitively stated that they do not pursue individual taxpayers regarding recycling.

If this is written in black and white somewhere by HMRC it might alter my plans over the next 2 years as there are more aggressive things I could do that what I am planning right now.

You'll find one of the pension pros mentioning it in previous discussion. That's also where the don't use a joint account comes from.

HMRC haven't put it in public that they never will do it and I doubt they will.

The legislative history shows the government trying to make the intent clear:

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https://publications.parliament.uk/pa/cm200506/cmhansrd/vo060704/debtext/60704-0014.htm

Mr. Hoban: I am grateful to my right hon. Friend for putting me back on track—as, indeed, did you, Madam Deputy Speaker. He has made an important point. We are asking taxpayers to examine the rules carefully, and to draw their own conclusions about whether they may be recycling lump sums. The amounts involved are relatively small: they may be as little as 1 per cent. of a person’s lifetime allowance, which is £15,000.

Rob Marris rose—

Mr. Hoban: The hon. Gentleman must realise that a number of people will build up £60,000 in their pension funds, and £15,000 is 25 per cent. of that. People with pension funds of that size will not be in a financial position to seek the expertise of members of the Institute of Chartered Accountants, such as myself, or lawyers or pension advisers. There is a real issue here: to what extent will people be able to interpret the Bill and the fairly detailed explanatory notes, and reach their own conclusions?

What will ultimately dissuade those people is the threat of having to pay 55 per cent. of the lump sum as a penalty. People who might otherwise wish to embark on sensible pre-retirement planning may find it difficult. We should also bear in mind that the pension contribution that is required to trigger the charges is only 30 per cent. of £15,000—£4,500. Relatively small sums could have an impact on someone’s overall pension. I believe that the law should be clear and straightforward so that people can understand, and that there should be some certainty.

The Economic Secretary to the Treasury (Ed Balls) rose—

Mr. Hoban: I shall explain in a moment how we might provide that certainty, but I think the Economic Secretary wants to “envisage” something first.

Ed Balls: I shall resist the temptation to return to past debates. I merely wanted to give some reassurance to the hon. Gentleman and the right hon. Member for Suffolk, Coastal (Mr. Gummer). The hon. Gentleman

4 July 2006 : Column 721

quoted a number of advisers who may or may not have been involved in the marketing of these schemes. May I give him a quotation from the Chartered Institute of Taxation, which may provide some reassurance?

https://publications.parliament.uk/pa/cm200506/cmhansrd/vo060704/debtext/60704-0015.htm

“The PBR announced changes in the pension rules to prevent recycling of pension funds. CIOT was worried lest the ordinary taxpayer, with no tax avoidance motive, would be inadvertently caught, and wrote to HMRC setting out these concerns. HMRC were receptive to these comments and took them into account when drafting the proposed legislation and guidance. We believe the resulting provisions are workable and should prevent marketed avoidance without catching the innocent.”

I hope that that does provide some reassurance. This is well-made policy, which means that the innocent will not be caught, but those who are paying large amounts for tax avoidance purposes will.

Mr. Hoban: I am grateful for the quotation. I shall consider the issue of certainty in a moment.

Rob Marris rose—

Mr. Hoban: The hon. Gentleman seems to be hovering on the verge of an intervention. Does he wish to intervene again?

Rob Marris: I am grateful to the hon. Gentleman for his generosity. Perhaps I am not understanding him correctly: I cannot see what is so complicated about knowing whether one has reinvested a lump sum from a pension scheme, returning it to the pension scheme.

Mr. Hoban: If it is so clear, why are 21 examples and 28 pages of guidance necessary? However, let me take up something that the Economic Secretary said. Clause 159 is quite short and has a broad application, but its impact is mitigated by the 28 pages of guidance, which are very clear.

Ed Balls: Let me give the hon. Gentleman some further reassurance. We have debated the issue before, and I shall return to it shortly, but let me give him a second quotation from the Chartered Institute of Taxation:

“HMRC have consulted effectively on these changes; the resulting rules seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments, while the guidance includes a lot of excellent worked examples”.

In fact, there are almost 28 pages of them. It is the volume of those worked examples that means that the guidance is fit for purpose. The hon. Gentleman ought to praise us for being so open and transparent in our efforts to help people, rather than criticising us.

Mr. Hoban: What the Economic Secretary has said demonstrates why the position is not as clear as the hon. Member for Wolverhampton, South-West suggested.

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The repeated discussions here over the years have shown that Mr. Hoban was correct in his concern that individuals would be concerned on reading the rules even though Mr. Balls was explicit in what he quoted that the target is to "prevent marketed avoidance" and "the resulting rules seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments".

None of the many discussions here have involved marketed tax avoidance schemes or systematic structured tax avoidance.

jamesd

NickBFS said:

Besides, the DC portion of the USS scheme does not allow flexi drawdown (they only allow UPFLS). I would therefore have to arrange a transfer of my DC pot to a SIPP and pay SIPP charges

That may also mean becoming subject to higher rate income tax because of that rule and avoiding that can be done with a temporarily higher pension contribution, without PCLS recycling intent being involved, both as the 25% tax free in UFPLS isn't a PCLS and just because it's sensible and ordinary retirement planning to try to avoid a higher tax rate.

jamesd

NickBFS said:

Indeed. HMRC give an example on this page of their pensions tax manual: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850 (see second paragraph of example 3).

Yes and I edited my post to quote that before I'd read your helpful post pointing it out.

Pat38493

jamesd said:

The repeated discussions here over the years have shown them at Mr. Hoban was correct in his concern that individuals would be concerned on reading the rules even though Mr. Balls was explicit in what he quoted that the target is to "prevent marketed avoidance" and "the resulting rules seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments".

None of the many discussions here have involved marketed tax avoidance schemes or systematic structured tax avoidance.

Thanks yes - the examples which are publicly visible on HMRC website, rather than being reassuring, some of them appear to give rise to exactly the concern that individual DIY pensioners might get caught in those rules.  A good example is someone on their own who decided to live off their savings in the last year before retirement, put almost their entire salary into their pension, and then take their TFLS upon retirement - at least one of the examples from HMRC appears to catch similar situations.  

I also suspect (but not sure?) that HMRC does not even actually know how much pension contributions each individual taxpayer is making if the contributions are via Salsac or net pay,  as those amounts are not even mentioned on any tax return or P60 or suchlike, so it doesn't appear to me that they have the ability to data mine this information today - they can only decide to investigate individual cases.

jamesd

HMRC gets reports of pension contributions so they will have a good idea about salary sacrifice, which shows up as company rather than individual contributions.

ussdave

I stand corrected.  Kind of crazy though.