Pension recycle rules

justwhat

I am looking to take some of my pension end of next year in a lump sum(age 55 next year). i currently work full time and and contribute 26-30k into my pension per year.(100% of earnings). Been doing this for the last  two years

 i should have two 50k pots in 2 different pensions. Will also have a small salary based pension of 1k per annum.

i will stop paying 100% of my wages into pension in April next year.

Can i take my tax free lump sum from pension/pension(s) and contribute it to into another pension? Without falling foul of recycling rules?

Is what i intend to do the most tax efficient use of my pension pots?

Linton

Taking a TFLS and redepositing it back into a pension is precisely what the recycling rules are intended to discourage.  You are getting a TFLS twice from the same pot of money.  HMRC dont like that.

Whether you can be "clever" with the rules is up to you to investigate and whether HMRC would do anything even if you  do break the rules is unclear.  To the best of my knowledge over the past 20n years no-one on this forum has ever reported  HMRC taking any action on recycling.  Similarly I have never come across any test cases being reported.  Perhaps you could be the first one.  That would be useful since it would clarify the rules.

Why are you taking the TFLS when you clearly have money outside your pension to cover large expenses?  It is usually better to keep a pension fully invested until you need it.

justwhat

i assume  HMRC would not be bothered as i have a track record of depositing 26k+ into pension. And i would still be working, hopefully.

I am unable / unwilling to continue depositing my PAYE wage into my pension. At the moment i am living on my savings and  my pension pot is going up. 

Drawing my  tax free lump sum(or a portion) and redepositing into another pension would gain the tax relief provided,  i am still working?

Linton

I suggest you read https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDA40PQB and the detaiIs to which it refers.  I noted the following paragraph regarding one of the conditions when the recycling rule applies:

because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be.
 
which would clearly seem to apply to your situation.  The others would also seem to apply.

You are likely to find that having read and understood all the info in the tax manual you are still unclear as to your recycling situation.  Sadly, there is nothing else definitive available.  That is why we need a few test cases. You will have to make your own decision.

Sarahspangles

justwhat said:

I am looking to take some of my pension end of next year in a lump sum(age 55 next year). i currently work full time and and contribute 26-30k into my pension per year.(100% of earnings). Been doing this for the last  two years

 i should have two 50k pots in 2 different pensions. Will also have a small salary based pension of 1k per annum.

i will stop paying 100% of my wages into pension in April next year.

Can i take my tax free lump sum from pension/pension(s) and contribute it to into another pension? Without falling foul of recycling rules?

Is what i intend to do the most tax efficient use of my pension pots?

You fall at the first hurdle on this because you’re setting out to recycle a lump sum. So you would be reliant on presenting this as one of the scenarios that may not be recycling, based on published examples.

When you draw down your 25% tax free, the 75% you leave behind is crystallised and will be taxed when you do draw it. Including any investment growth. There must be a point where the additional tax relief received by recycling a lump sum is lower than the additional tax you will pay on drawing down the value of the investment growth.

Albermarle

Regardless of the recycling rules, you can not of course contribute more to a pension than your earned income.
So if you earn £30K, the max you can add is £30K gross( including the tax relief) .

justwhat

Sarahspangles said:

justwhat said:

I am looking to take some of my pension end of next year in a lump sum(age 55 next year). i currently work full time and and contribute 26-30k into my pension per year.(100% of earnings). Been doing this for the last  two years

 i should have two 50k pots in 2 different pensions. Will also have a small salary based pension of 1k per annum.

i will stop paying 100% of my wages into pension in April next year.

Can i take my tax free lump sum from pension/pension(s) and contribute it to into another pension? Without falling foul of recycling rules?

Is what i intend to do the most tax efficient use of my pension pots?

You fall at the first hurdle on this because you’re setting out to recycle a lump sum. So you would be reliant on presenting this as one of the scenarios that may not be recycling, based on published examples.

When you draw down your 25% tax free, the 75% you leave behind is crystallised and will be taxed when you do draw it. Including any investment growth. There must be a point where the additional tax relief received by recycling a lump sum is lower than the additional tax you will pay on drawing down the value of the investment growth.

I was only intending to draw down the 25% tax free amount and deposit it in another pension. i would just leave the remainder until i needed it.

Sarahspangles

justwhat said:

Sarahspangles said:

When you draw down your 25% tax free, the 75% you leave behind is crystallised and will be taxed when you do draw it. Including any investment growth. There must be a point where the additional tax relief received by recycling a lump sum is lower than the additional tax you will pay on drawing down the value of the investment growth.

I was only intending to draw down the 25% tax free amount and deposit it in another pension. i would just leave the remainder until i needed it.

The point is that if, say, you have £10k and take the full 25% - £2.5k - tax free, the remaining £7.5k is crystallised. If this grows to £20k before you need it, you would pay tax on all £20k when you draw it down, assuming you’ve already used up your personal allowance on other income. So out of £22.5k you would only get £2.5k tax free.

Albermarle

Sarahspangles said:

justwhat said:

Sarahspangles said:

When you draw down your 25% tax free, the 75% you leave behind is crystallised and will be taxed when you do draw it. Including any investment growth. There must be a point where the additional tax relief received by recycling a lump sum is lower than the additional tax you will pay on drawing down the value of the investment growth.

I was only intending to draw down the 25% tax free amount and deposit it in another pension. i would just leave the remainder until i needed it.

The point is that if, say, you have £10k and take the full 25% - £2.5k - tax free, the remaining £7.5k is crystallised. If this grows to £20k before you need it, you would pay tax on all £20k when you draw it down, assuming you’ve already used up your personal allowance on other income. So out of £22.5k you would only get £2.5k tax free.

The argument usually made here is that if the 25% tax free is invested in the same way as in the pension, it will all come out in the wash.
For example. For £7.5K to grow to £20K it would be growth of 166%.
The same growth on £2.5K would mean the tax free cash will have grown to £6,666.

£6666 divided by £26666 = 25%