Pension recycling rules

Pete36

Hi,

I took my pension lump sum last Nov which was a six figure amount. For various reasons unfolding I will now have a higher income this year than I expected and next year (hopefully). For these reasons I'd like to pay more into my scheme again to use up some higher rate relief.

Reading the recycling rules, the one that I could fall foul of then is, 'is the increase in contributions greater than 30% of the lump sum over a 5 year cumulative period?' So I am only in NEST at the moment which is minimal contributions then if I keep the additional contributions to say 30% of £100k i.e. £30k then can I pay this in in the years of my choosing e.g. this year (year 3) or all of it in year 5? Does it matter which as if it's below 30% then HMRC won't mind? Does that make sense?

Pete

NickBFS

If the increase in contributions can be attributed to an increase in income, you will be OK. The recycling rules apply only if the increase in contributions can be attributed to ("because of") the lump sum. It is for HMRC to demonstrate this. I don't think that there would be any issue if the increase aligns with (both in time and in amount) an increase in income. 

jamesd

"For various reasons unfolding I will now have a higher income this year than I expected". No recycling was planned when you took the tax free lump sum and it's a mandatory requirement that HMRC must prove pre-planning.

In addition, if you've an established pattern of following the higher rate then that would be your expected amount and only the increase above it would count.

Yes, you can use any year in the five years. It's total actual contributions minus total expected over the whole five years. But it's irrelevant to your situation.

Just get on with optimising your contributions since rules not designed to stop individuals don't catch you. They were intended to stop organised schemes. That worked but has produced a steady stream of needlessly worried people.

If your pay is enough you might usefully max out the annual allowance, other circumstances permitting.

Unless it's a work salary sacrifice scheme please don't use NEST. The initial charge is wasteful and the least bad option seems to be their Sharia fund. If lifestyling isn't off they put lots of money into low growth investments at the start and up to ten years from specified retirement date.

Pete36

Thanks for your replies. I always intended to take my lump sum just to move it into ISAs etc and away from the every changing pension rules. I've always tried to have a rule that my wife and I contribute as much as we can to get us down to the basic rate threshold except my income is sporadic from 30-40k some years to probably 90k this year.  The company I work is too small to bother with proper schemes. I suspect only 10 of us are in it. I know it's annoying. Also NEST contributions are capped at £50k salary per annum I think so my contributions are quite small but I'l transfer them to my SIPP once a year or whatever they allow. It's just background noise. 

jamesd

NEST make you stop paying in at work before they will let you transfer. Not a legal requirement, just them playing lock you in games. Better direct to your SIPP so long as work isn't salary sacrifice.

The pension rules have steadily been becoming less restrictive. Changes but for the better, mostly, cutting of amount of lifestyle allowance until if was eliminated was the main negative one.  No harm in taking tax free lump sum and briskly reinvesting in ISAs though.