Taking lumpsum and then contributing into pension - pension recycling ?

BlisteringBarnacles

Turned 55 last year and left my job end of last year. Currently unemployed (taking a break).

Next month, say end of Sep, I may wish to take out 25% tax free cash lumpsum (£250K) from DC pension pot of £1 mill and go into "deferred drawdown".

And considering full time work from October. Not sure if I will even get a job or a decent salary. Assuming I do get, can I contribute to DC pension in my new job of upto £60,000 in tax year 2024-2025 without falling foul of pension recycling rules ?

I guess the principle of recycling rules is : You cannot take the tax free money out and then immediately deposit it (or most of it) into a pension to get free money from the govt. Clearly I will not be doing that as I plan to contribute from the new salary.

If necessary I can keep the bank trail separate, i.e the bank account / investment platform that the tax free cash lumpsum ends up in is kept separate from the bank account / pension/SIPP provider for the new salary pension contribution money. Will that help / is it necessary ?

Aside : Would it bolster my case (that I am Not pension-recycling) if I pension-contribute less / say only 20 or 30,000 this year ? I have no clue what salary I will get and half the year is already over, so I doubt I will be able to salary sacrifice 60,000 into a pension.

Thanks.

Dazed_and_C0nfused

How much do you expect to earn at this job in the current tax year i.e., the taxable pay that will be on your P60 next April?

PropertyGuru_Wannabe

You can only contribute how much you have earned. If you haven’t earned anything from your PAYE then the max you can contribute is £2880. If you pay more then you will get a penalty for this which the tax man will inform you no doubt. If you hit MPPA by crystallising your pension the max you can contribute is 10,000.

BlisteringBarnacles

Thanks to both of you for replying.

Apologies if I did not describe my situation in sufficient detail.

1) Right now on a long break.
2) DC Pension pot is at 1 million. Plan is to crystallize very soon, take out 25% tax free lumpsum and NOT touch a penny from the rest of it. I believe it is called "deferred drawdown". No question of triggering MPAA since I will not be taking any income/drawdown
3) No job yet. Will start looking but given my experience, I may land something in £70K - £80K. My ex colleagues are making a lot lot more in contracting.

4) Bottomline : I plan to contribute to DC pension based only on how much I earn. 

 - No job or I get a job with 50K salary : I may just contribute £2880 as you pointed out.

 - At 80K I may contribute 30K. At 100K, I may contribute 50K.

My question remains : After taking the 20K tax free cash lumpsum, If I get a (fairly) high paying job can I sock away good chunks into DC pension from fresh salary without falling foul of pension recycling rules ?

Thank you so much.

Roger175

Why do you want to take the 25%?  Why not consider UFPLS

PropertyGuru_Wannabe

Source:  www.unbiased.co.uk

What are the pension recycling rules?

You can use pension recycling to boost your pension contributions and gain extra tax relief.

But HMRC can impose a charge of up to 70 per cent of the value of your tax-free cash to prevent people from trying to exploit the rules and benefit from artificially high tax relief.

The rules will not usually be applied to normal retirement planning. 

So, when could you be affected by the pension recycling rules?

If all of the things below happened, you could incur a tax charge from HRMC: 

• You take a tax-free lump sum from a pension 

• Contributions paid into a pension are larger than they would have been, because you have added some tax-free cash 

• After assessing your case, HMRC have decided that the recycling was pre-planned

• The amount of tax-free cash you take is more than £7,500, when added to any tax-free cash taken in the previous 12 months

• The amount of all additional contributions exceeds 30 per cent of the tax-free cash 

HMRC is generally only concerned if they see an increase in excess of 30 per cent on expected contributions. Only then will they consider applying the extra tax charge. 

PropertyGuru_Wannabe

Recycling rules

Assuming the recycling was pre-planned, an unauthorised payment charge will apply to the tax free cash taken if all of the following limits are exceeded.

• The tax free cash (including any tax-free cash taken in the past 12 months) is more than £7,500 and
  
• The total of the increases in pension payments in the tax year (and the two tax years either side) is at least 30% of the tax free cash taken, and 
• The pension payments made are significantly larger (generally 30%) than might be expected.

If recycling is kept within these limits, tax free cash can be used to make payments into a pension scheme (even with pre-planning).

It's also worth noting that tax free cash can be used to fund someone else's pension without falling foul of the tax free cash recycling rules - for example, making payments to a pension for a spouse/partner, child or grandchild. The rules only apply when the individual is recycling tax free cash back into a pension in their own name.

Qyburn

Roger175 said:

Why do you want to take the 25%?  Why not consider UFPLS

OP is planning to take out £250k. As UFPLS that would run up a monstrous tax bill, as well as triggering MPAA.

Roger175

Qyburn said:

Roger175 said:

Why do you want to take the 25%?  Why not consider UFPLS

OP is planning to take out £250k. As UFPLS that would run up a monstrous tax bill, as well as triggering MPAA.

I didn't read it that way. He said "I may wish to take out 25% tax free cash lumpsum (£250K) from DC pension pot of £1 mill" and subsequently said "DC Pension pot is at 1 million. Plan is to crystallize very soon, take out 25% tax free lumpsum and NOT touch a penny from the rest of it."

He didn't say he wants £250,000 for a specific purpose and I was simply asking why he is considering taking the 25% lump sum now?  I may have misunderstood, but worth checking as normally this might well be considered an inappropriate course of action.

westv

To answer the question, you can contribute as much as you like to your pension up to the earnings and contribution limits. HMRC will have no interest in how this is funded.

Pat38493

PropertyGuru_Wannabe said:

Recycling rules

Assuming the recycling was pre-planned, an unauthorised payment charge will apply to the tax free cash taken if all of the following limits are exceeded.

• The tax free cash (including any tax-free cash taken in the past 12 months) is more than £7,500 and
  
• The total of the increases in pension payments in the tax year (and the two tax years either side) is at least 30% of the tax free cash taken, and 
• The pension payments made are significantly larger (generally 30%) than might be expected.

If recycling is kept within these limits, tax free cash can be used to make payments into a pension scheme (even with pre-planning).

It's also worth noting that tax free cash can be used to fund someone else's pension without falling foul of the tax free cash recycling rules - for example, making payments to a pension for a spouse/partner, child or grandchild. The rules only apply when the individual is recycling tax free cash back into a pension in their own name.

OP should have a read through the pension recycling guidelines on the gov.uk website where there are also some examples.

Regardingt the point in bold, the pension contributions should not exceed 30% more of "what would otherwise have been expected".  HMRC provides several examples, but they don't cover every permutation and the examples are arguably a bit contradictory when considering other possibilities.

There is also an additional rule that the amount recycled should not be more than 30% of the total TFLS taken.

Fundamentally, if you take a 250K tax free sum, and then you earned say 60K and paid the whole 60K back into the pension in the same tax year, it's difficult to see how this would breach the recycling rules because 60K is less than 30% of 250K, so even on that simple test, the recycling rule is not triggered.

Further, you state that you don't have a job now and are thinking of looking for one, and if you get one you will pay further pension contributions.  Since you don't know whether you will succeed in getting a job or not, it's difficult to then conclude that the recycling is pre-planned.

Beyond that, there have been various discussions on this forum before where some posters claimed that HMRC does not pursue individual taxpayers on this recycling topic, and that the rules are only used for commercial mass recycling schemes by adviser firms.  IFAs on this forum have stated in the past that there has never been a single court case about recycling up to now (which also means that no precedent has been set as the courts would look at the actual legislation in law rather than HMRC guidelines as a starting point).