Pension Recycling - A Check Please

dodmwe

Just taken £268,275 tax free PCLS (£230k from DB and £38k from DC) aged 55. The reason I took my DB lump sum and income was because the scheme was about to slash the commutation factor, and increase the early retirement factor. I took the smaller DC lump sum to avoid fiscal drag. I now receive a DB pension of £30k per year.

In 2022-23 tax year I paid a gross pension contribution of £83k, and 2023-24 tax year I paid a gross pension contribution of £61k. Both payments were into a DC scheme.

I plan to pay £60k into the DC pension in the current tax year, £60k in the next 2025-26 tax year, and £60k in the following 2026-27 tax year.

As my planned pension contributions in 2024-25 (tax year lump sum/income initiated), 2025-26 and 2026-27 (two tax years after lump sum/income was paid) will be the same or less than both 2022-23 and 2023-24 (two tax years before lump sum/income was paid), I believe I cannot be challenged by HMRC if I understand the rules correctly.

None of this was pre-planned as it came out of decisions around significant reduction in commutation/early retirement factors and fiscal drag. But, I want to make sure based on the above information there should not be an issue. Especially as there are very wise and knowledgeable people of this forum.

Pat38493

The test on increase in contributions is whether the contributions during current tax year, preceding 2 tax years, and following 2 tax years are more than 30% greater than what they otherwise would have been

If you already established a pattern of paying in the maximum (even using carryover) in prior years, and you can afford to pay the £60K in without reducing your standard of living and without the PCLS, you are definitely fine.

If you are technically using the PCLS to subsidize your living to make those contributions, it then becomes a question whether it's more than 30% more than what you would have put in otherwise (and also whether the amount of tax free cash being put back in is more than 30% of the entire amount taken).

Even then, I doubt this would be a problem for HMRC based on the figures you posted, especially since as you say you did not pre-plan.

By the way, how did you find out that your DB pension scheme was going to "slash" commutation rates?  I've seen other posts where it was said that DB schemes can just do that without even notifying anybody.

Sam_666

Yup, you are all good, as long you are earning at least £60K in each year.

dodmwe

Pat38493 said:

The test on increase in contributions is whether the contributions during current tax year, preceding 2 tax years, and following 2 tax years are more than 30% greater than what they otherwise would have been

If you already established a pattern of paying in the maximum (even using carryover) in prior years, and you can afford to pay the £60K in without reducing your standard of living and without the PCLS, you are definitely fine.

If you are technically using the PCLS to subsidize your living to make those contributions, it then becomes a question whether it's more than 30% more than what you would have put in otherwise (and also whether the amount of tax free cash being put back in is more than 30% of the entire amount taken).

Even then, I doubt this would be a problem for HMRC based on the figures you posted, especially since as you say you did not pre-plan.

By the way, how did you find out that your DB pension scheme was going to "slash" commutation rates?  I've seen other posts where it was said that DB schemes can just do that without even notifying anybody.

Thanks. I'm not increasing my pension contributions from the previous 2 tax years, so all looks good to contribute at up to £60k for this tax year, and the next two tax years.

As for your question, my company DB scheme did notify the members in advance, but it was so poorly communicated that many complained and then they decided to write to all members of pension age and allow them more time to decide. So, they did the right thing.

I had no intention of taking my pension at 55, but my commutation factor was reduced from nearly 29 to just over 20 if I didn't proceed with the (better) older terms. Furthermore, delaying my pension would have also increased the early retirement factor (ERF) from 3%/year to 4%/year, and I am looking to work only another couple of years.

I calculated that taking my pension at 58 under the new terms was similar to taking my pension at 55 under the old terms, even with the 3%/year ERF reduction. My wife being retired early and having no income meant the PCLS could be gifted to her, and we'd pay no tax on the saving interest and/or dividends. This sealed the deal.

Pat38493

dodmwe said:

As for your question, my company DB scheme did notify the members in advance, but it was so poorly communicated that many complained and then they decided to write to all members of pension age and allow them more time to decide. So, they did the right thing.

Seems you are lucky.  My deferred DB pension is administered by Mercer (I think they changed their name to Aptia or suchlike recently) and it's like getting blood out of a stone to get anything other than - "here is your estimate" and standard form covering letters.  

I have actually just triggered my DB pension for age 56 with PCLS as I am planning to go part time at work in January (request already submitted), and planning to finish work some time in the next year or two unless I really enjoy the PT working.  Having the PCLS and DB allows me to finish work earlier with much lower SWR risk to the first 11 years and mostly avoiding paying HR tax during that time, so it suits me even though many would say that I should have delayed the DB still NRA.  Wife is also early retired but with DB income, however will gift the PCLS to her whilst I am still paying HR tax and she is not.  

Bit of an overlap where I will pay too much tax on the DB whilst still working but at least I will know the exact amounts and not have them recalculating it umpteen times.  On the bright side, if I did carry on working Part time, after the first 2 years or so, my salary plus DB pension will cover all my spend.