Tax free lump sum recycling rules and paying into new pension

mamacita63

I just want to check that I have interpreted the TFLS recycling rules correctly. I have recently taken my 1995 NHS pension (including lump sum of £39755) as the NPA is 60 and I turned 60. I still work full time (and contribute to the 2015 pension) so I now have extra disposable income. I am about to open a SIPP and was hoping to pay in about £13000 per year. However I don't want to fall foul of the recycling rules. To be on the safe side, is it wisest to contribute no more than £11926 per year (30% of value of the lump sum)? I will not be actually using the lump sum at all.

Marcon

mamacita63 said:

I just want to check that I have interpreted the TFLS recycling rules correctly. I have recently taken my 1995 NHS pension (including lump sum of £39755) as the NPA is 60 and I turned 60. I still work full time (and contribute to the 2015 pension) so I now have extra disposable income. I am about to open a SIPP and was hoping to pay in about £13000 per year. However I don't want to fall foul of the recycling rules. To be on the safe side, is it wisest to contribute no more than £11926 per year (30% of value of the lump sum)? I will not be actually using the lump sum at all.

There are plenty of threads on this forum about recycling, pretty much all of them confirming nobody really knows - but yours looks very like the sort of classic recycling HMRC might look at more than once.

Not sure why you think drip feeding an amount equal to just under 1/3rd of your lump sum is 'being on the safe side' - see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830

noh

I would say that the OPs intended action does not fall foul of the recycling rules assuming that reason for taking the lump sum was not to recycle it.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810
"The recycling rule does not apply where an individual takes a pension commencement lump sum and, when taking that lump sum, had no intention of using the lump sum as a means, whether directly or indirectly, to pay contributions into a registered pension scheme. This is because the recycling rule applies only where the recycling was planned before the first relevant transaction."

mamacita63

Marcon said:

mamacita63 said:

I just want to check that I have interpreted the TFLS recycling rules correctly. I have recently taken my 1995 NHS pension (including lump sum of £39755) as the NPA is 60 and I turned 60. I still work full time (and contribute to the 2015 pension) so I now have extra disposable income. I am about to open a SIPP and was hoping to pay in about £13000 per year. However I don't want to fall foul of the recycling rules. To be on the safe side, is it wisest to contribute no more than £11926 per year (30% of value of the lump sum)? I will not be actually using the lump sum at all.

There are plenty of threads on this forum about recycling, pretty much all of them confirming nobody really knows - but yours looks very like the sort of classic recycling HMRC might look at more than once.

Not sure why you think drip feeding an amount equal to just under 1/3rd of your lump sum is 'being on the safe side' - see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830

And I'm not sure why you have to be rude when I am simply trying to understand the rules. I looked at previous threads and they did not answer my question.

mamacita63

noh said:

I would say that the OPs intended action does not fall foul of the recycling rules assuming that reason for taking the lump sum was not to recycle it.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810
"The recycling rule does not apply where an individual takes a pension commencement lump sum and, when taking that lump sum, had no intention of using the lump sum as a means, whether directly or indirectly, to pay contributions into a registered pension scheme. This is because the recycling rule applies only where the recycling was planned before the first relevant transaction."

Thank you, that's helpful. It all seems a bit unclear but my intention is definitely not to recycle my lump sum as that will be kept as savings and has no bearing on my additional contributions.

Marcon

mamacita63 said:

Marcon said:

mamacita63 said:

I just want to check that I have interpreted the TFLS recycling rules correctly. I have recently taken my 1995 NHS pension (including lump sum of £39755) as the NPA is 60 and I turned 60. I still work full time (and contribute to the 2015 pension) so I now have extra disposable income. I am about to open a SIPP and was hoping to pay in about £13000 per year. However I don't want to fall foul of the recycling rules. To be on the safe side, is it wisest to contribute no more than £11926 per year (30% of value of the lump sum)? I will not be actually using the lump sum at all.

There are plenty of threads on this forum about recycling, pretty much all of them confirming nobody really knows - but yours looks very like the sort of classic recycling HMRC might look at more than once.

Not sure why you think drip feeding an amount equal to just under 1/3rd of your lump sum is 'being on the safe side' - see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830

And I'm not sure why you have to be rude when I am simply trying to understand the rules. I looked at previous threads and they did not answer my question.

I appreciate my answer isn't what you want to hear, but there is nothing 'rude' about it. I merely pointed out that this is a murky area (hence my reference to other threads on this forum), and also - with the intention of being helpful - gave you the link relating to cumulative contributions, which based on your question you had probably not seen.

xylophone

 

You took your  Defined Benefit 1995 pension at Scheme Pension Age.  It had an automatic lump sum of three times  annual pension and a monthly pension?

That is all fine.

This was not a DC pension so not "flexi access drawdown".

You are not intending to recycle your lump sum.

Rather you intend to regard the monthly  DB pension as income replacement, enabling you to increase your retirement provision by contributing to a SIPP.

Now read 

https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash

jamesd

What you're doing is called ordinary retirement planning and isn't restricted by the PCLS recycling rules.

You took the DB pension and lump sum together at the normal age. Utterly normal and the PCLS is just incidental to that.

There are no restrictions on recycling income into new pension contributions. That includes pension income.

Should you want to waste more time on a rule never used against individuals you should look at the five year rule which examines whether the increase in expected contributions over the two years before PCLS, the year it's taken and the two following years is more than 30% if the PCLS higher than expected. In your case it might go something like this:

1. Look at your past pattern of DC contributions to get a base pattern not allowing for extra income
2. Increase 1 by your extra income to get your expected contribution level for the final three years
3. Add the excess over 1 for the two previous years and the excess over 2 for the final three years. If the total excess is more than 30% of the PCLS then the excess might be impermissible recycling.
4. Except it isn't because it's just normal retirement planning and the happenstance of passing through a scheme normal retirement age during the period.

You aren't a target of the rule, your situation is normal retirement planning and you're free to use the PCLS for pension contributions if you want because using it for that wasn't pre-planned but just incidental to when you reached 60 and preplanning is a mandatory requirement for PCLS taking then recycling to breach the recycling rules.

I recommend using savings and income to make your pension contributions as high as your income and annual allowance permit.

Should you need to withdraw pension money to help in later years you can do these things without possibility of breaching the recycling limits:

1. Use the small pot rule. Three times in your life you can take the whole of a pot worth up to £10k. You can move, split and combine pots to get to 10k and maximise your benefit. Transfer some to Hargreaves Lansdown and they will do it behind the scenes for you in exact £10k chunks at no cost. 25% of the money is tax free but its regulatory classification isn't PCLS so it's ignored. The other 75% is added to your taxable income in the year taken.

2. Take up to £7,500 of PCLS per rolling twelve month period, not tax or calendar year. This magic number is contained in the rules.

You may also find that your higher contributions have raised your expected contribution level high enough for there to be no further increase above what is expected.

In addition, recycling only applies to the individual who received the PCLS. If you have a spouse and received the £39755 into an account not in their name (including not joint) you can gift the money to them and they can make contributions to a pension in their name. Applies to anyone else, not just a spouse.

They would be free to take a 25% PCLS from the pension they paid that into and gift it to you for you to use for contributions. However, this must be clearly not a mutually arranged way to circumvent the rules so it's not something you can set up and repeatedly do, swapping lump sums with eachother routinely.

mamacita63

xylophone said:

 

You took your  Defined Benefit 1995 pension at Scheme Pension Age.  It had an automatic lump sum of three times  annual pension and a monthly pension?

That is all fine.

This was not a DC pension so not "flexi access drawdown".

You are not intending to recycle your lump sum.

Rather you intend to regard the monthly  DB pension as income replacement, enabling you to increase your retirement provision by contributing to a SIPP.

Now read 

https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash

Thank you so much for your help, yes a DB automatic lump sum and absolutely not intending to recycle the lump sum.

mamacita63

@jamesd thank you for such a detailed response - I appreciate it so much. I think you are right, the pre-planning element is the part where the rule doesn't apply to me. Just makes me a little bit nervous!

jamesd

You're far from alone in that! The issue of unnecessary worry was raised in Parliament when the system was introduced and sadly people unnecessarily worried about it have been a routine feature of posts here ever since.