Pension Recycling Questions

Nicjoe

Background

I am 59, and will be 60 in April.

 I am working and am part of 2 pension schemes -

1)      Defined Benefit Teacher Pension which has

-          A mainly final salary element payable at 60; this comprises a pension income and a compulsory lump-sum

-          A smaller (2year) career average element payable at state pension age or before with actuarial reductions if taken earlier than state pension age.

 

2)      A deferred member pension from Clydesdale Bank.  I am going to take the bank pension when I turn 60 in april 2024.   It will be £2120 per year with no lump sum.  Another option is to take it PIE (Which means  without indexing)  which would make it £2604 per annum.

My problem (potentially I hope) relates to a SIPP which I opened in January 2024.

Retirement Plans

I am now hoping to go for phased retirement from teaching as of August 2024.  This would involve me taking 75% of my DB Teacher pension and continuing to work 3 or possibly 4 days per week.

Figures

Likely Figures from Teacher Pension Retirement in August 2024 –

Annual pension income from final salary scheme £15122   

Compulsory Lump Sum element £45366

The above figures are not exact as they would have to give me a final estimate (it takes the teacher pension agency about 12 weeks).  I think the figures are pretty close to what I will get.

In addition -

I could also take the career average element which after actuarial reduction would add about another £1370 income per annum with no lump sum on this element.  I would prefer to no take this bit until a couple of years from now.

Background Info

I had savings of £35k going into tax year 23/24.  I also had cash ISAS worth £150k. My gross income  from teaching is currently £52856 per year.  I normally save about £15k-£17k  per annum from salary.

I sold my flat and moved to a house in August 2023.  The lower price of my new house resulted in a 90K increase in my savings. The flat sold well above valuation – so the extent of the gain was a pleasant surprise.

My feeling now was that I had way too much cash and wanted to invest some for the long term.  I have concerns about too much cash being vulnerable to Inflation going forward –  I invested 20K in a cash ISA for this year(23-24), increasing my cash ISAS to £172k.

I then latterly hit on the idea of putting money into the SIPP.  The benefit of the SIPP was that this year my earnings from the job are £52k.  In Scotland this means I pay about 9k at higher rate tax. We also had an element of last year’s pay rise paid to us in the current tax year – boosting the tax year earnings.   I am also being taxed at 40% on my savings. 

So with all of that - I opened this SIPP, put in the £8100. I was thinking of putting in more this year and maybe another 10k next year.  Then a couple of weeks back I found articles online about the Recycling Rules. 

I am now concerned I might not be able to enact my plan to take phased retirement and take my final salary pension as the non-optional lump sum I get might get caught by recycling rules due to the £8100 in the SIPP.

I am also worried about making further contributions to the Sipp over this year and the next couple of years.

Contributions – I am trying to look at what might be considered ‘extra’ contributions in the last couple of tax years.

Contributions rule – I read that HMRC consider a 30% increase over the relevant 2 tax years  prior to taking  lump sum as a ‘significant’ increase and as a rule of thumb they could take it as evidence of recycling.

SIPP

I opened the SIPP in January 2024 and put £8100 in (tax year 23/24).

AVCs

I also pay an AVC into the teacher pension – this was at about £360 per annum (about £30 per month) for a long number of years until-2020, then I increased it to £900 (about £75 per month) in 2020.

In Oct 2021 I increased it again to £2400 per annum (£200 per month).  These were monthly deductions from salary. 

So AVCS contributions in tax years 22-23 and 23-24 were £2400 per annum.

I also contribute 10.2% of salary as part of the teacher pension DB scheme. The employer contributes 23.68% of salary.  

 

Is the calculation below correct with regard to my increased contributions?

My calculations on my increased contributions have been –

1)      SIPP - £8100

2)      Increased AVCs (paid monthly from salary) in tax years 22-24 – I take increase compared to tax year 19/20 where I paid £360 per annum -  the increase is £4080 over the two years 22-24. I have been cautious in calculating the increase here and haven’t taken the 20/21 figures of £75 per month in case it is deemed as not typical.

The teacher scheme contributions may have also increased automatically as a result of pay rises.  However I don’t think the db increases count as they are a mandatory part of the DB scheme.

I think therefore that my additional contributions over the tax years 22-24 would be my increase in AVC £4080 over the 2 years)  plus the SIPP of £8100.  In total I reckon this amounts to £12180.  This works out at 26.8% of the lump sum of £45366.

I hope the mandatory DB contribution don’t get taken is increasing contribution – this is what I read on HMRC website.

Would I be caught by the contributions rule?

 

Funding the Extra Contributions

Given that I had an extra 90K from house sale, save about £16k per year and had cash ISAs of £170k and that my salary Going forward I will have pension income from the teacher and bank pension schemes which would be about the same as 23/24 (roughly £2000 less).

Am I safe in showing that the increased contributions was provided by cash from the house sale and savings and motivated by the desire to invest long term and mitigate inflation/taxation impacts on my savings?

Would I be able to make further investments in the SIPP given I have all these savings?

 

Further Question – Given the lump sum is £45366, It is bigger than 30% of any increased contributions that should be ok?

Here I am relying that HMRC would calculate my increased contributions as £12180 mentioned above.  This would be about 27% of the lump sum.

My concern is that they also look at the scheme contributions rate and amount increases which I was contracted to pay.

 

Pre-planning

Pre-planning – as I had no idea about recycling or intention to use the lump sum in this way is there sufficient evidence for me to show pre-planned recycling and indeed actual recycling of the lump sum?

 

Sorry for volume of info – hope someone will be able to offer thoughts.

I have also put the info into table format below - 

Gross Contributions	Pre 20-21 (Paid AVC at this for a long number of years)	20-21	21-22	22-23	23-24
AVC to teacher pension	360		1650	2400	2400
SIPP					8100
Total Contributions	360	0	1650	2400	10500

Increase in contributions 22-24				22-23	23-24	Cumulative Increase 22-24
Increased  AVC- Taken as Increase from pre 20-21				2040	2040	4080
SIPP					8100	8100
Overall Cumulative increase						12180

Marcon

The key point to keep in mind is that recycling has to be pre-planned - and it's for HMRC to prove that was the underlying intention. From what you've said it seems unlikely they could prove the point, even supposing they took issue.

Nobody can give you a definitive answer, because there is so little information available. FOI requests are batted away with the response that they would be too expensive to answer because each case would need to be investigated individually - ie there are no central statistics to guide anyone.

Pat38493

Also, if I understood the whole thing, another key point is that said that a big part of your concern is about a "non optional lump sum".  

I think there is a comment in the recycling guidelines that implies that you cannot be accused of recycling if you didn't have any choice e.g. because the lump sum was not optional.

There has also been other posters here claiming that HMRC have implied in parliamentary committee hearings in the past that they have never pursued an individual taxpayer about recycling and they don't currently intend to.  However, even those statements could be open to multiple interpretations.

I would think in any case that if you can demonstrate that what you are doing is part of normal sensible retirement planning, and you are not "taking the michael", I doubt it would ever be an issue.  Also the amounts you are quoting are not that big in overall pension terms and I highly doubt that HMRC would assign the required resources to investigate it.

I am going to be carrying out measures that are not too dissimilar to this, but with significantly larger amounts, so I guess if they come after you, they will come after me as well, but I highly doubt it.