Pension top up just prior to retirement

Justso65

Hi

Would it be sensible just prior to retirement to add money from an ISA to my pension?

My thinking is just prior to the end of the tax year take £40k from my ISA and move it to my pension.  The SIPP provider will then claim circa £10k tax relief.  So my £40k ISA money becomes £50k in my pension.  I have enough headroom in my annual pension contributions limit to do this.  

Based on my salary, and living in Scotland, I could claim a further circa £7k via self assessment. No matter what I could claim back it would be a plus in my hand outside my pension.

I would then retire just before the end of the tax year and crystalise £160k giving me a £40k TFLS. I leave the £120k in a drawdown part of my pension.  I would then use the £40k TFLS to replace the £40k in my ISA either side of the tax year end.  I believe I can replace any ISA money I withdraw in the same tax year.  Even so, I’ve not used this year’s allowance yet.

So my ISA is back to where it was.  I have circa £7k tax relief rebate and my pension is £10k better off.

This would be a one off because I realise as soon as I crystalise any pension my pension allowance reduces significantly.  I’m not lump sum recycling because I’m using ISA money to add to my pension then using TFLS to replace the ISA money.

Any opinions are welcome.

JS

FIREDreamer

This sounds like recycling to me, however I am not aware that anyone has been “done” for doing something like this.

Albermarle

Adding extra to a pension from savings in the years before retirement is usually a good strategy, especially if you are a higher rate taxpayer ( and you can afford it of course).

However why bother taking out the tax free cash and putting it back into an ISA. There is often nothing to be gained by doing this. Also there can be delays in getting tax free cash paid.

I believe I can replace any ISA money I withdraw in the same tax year.
Only if it is a flexible ISA .

This would be a one off because I realise as soon as I crystalise any pension my pension allowance reduces significantly.

If you only took out tax free cash, then the MPAA limit of £10K max pa in your pension in future is not triggered. This only comes into play when you take taxable money from a crystallised pot.

TheSpectator

What is your expected earnings for the year you are planning to do this. What type of pension are you contributing to in addition to this, if any?

Justso65

I don’t see how it is recycling.  I am adding money to my pension as I can at any time.  I am under no obligation to wait a period of time before retiring.  I add money to my pension all the time and would do so right up to retirement.  I then decide to retire and get a TFLS which replaces my pension contributions for that year.  That would always happen at some point.  I have pension contributions, I retire, I get a TFLS and that repays some/all of my contributions for the year I retire in.

Were I to retire first, get the TFLS and put it back into my pension that is recycling.  However, my pension contribution allowance would be reduced immediately I took any TFLS to stop this recycling.

JS. 

NoMore

Paying from ISA does not necessarily avoid it being recycling,, 

the fact that the individual has other funds from which the significantly greater contributions are paid or could have been paid does not mean that the recycling rule is avoided.

however whether it will be judged as recycling, I don't know.

PTM133810 - Unauthorised payments: Deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: overview - HMRC internal manual - GOV.UK

bjorn_toby_wilde

I may be oversimplifying here but how can it be recycling if the TFLS isn’t going back into the pension?

Surely recycling is getting two bites at the tax relief by putting the lump sum back into the pension?

Linton

Justso65 said:

I don’t see how it is recycling.  I am adding money to my pension as I can at any time.  I am under no obligation to wait a period of time before retiring.  I add money to my pension all the time and would do so right up to retirement.  I then decide to retire and get a TFLS which replaces my pension contributions for that year.  That would always happen at some point.  I have pension contributions, I retire, I get a TFLS and that repays some/all of my contributions for the year I retire in.

Were I to retire first, get the TFLS and put it back into my pension that is recycling.  However, my pension contribution allowance would be reduced immediately I took any TFLS to stop this recycling.

JS. 

It does not matter whether you pay money in and then withdraw the TFLS or the other way around. Both can be regarded as recycling.

Justso65

NoMore said:

Paying from ISA does not necessarily avoid it being recycling,, 

the fact that the individual has other funds from which the significantly greater contributions are paid or could have been paid does not mean that the recycling rule is avoided.

however whether it will be judged as recycling, I don't know.

PTM133810 - Unauthorised payments: Deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: overview - HMRC internal manual - GOV.UK

That’s very interesting and my plan is covered by this statement on HMRC’s website.

“The recycling rule would also apply if, instead of funding the contribution directly from the lump sum, the individual takes the money that pays the contribution out of the available savings and then uses the £35,000 pension commencement lump sum to replenish those savings. A short-term loan in anticipation of the lump sum to repay it would be treated similarly”

So it seems HMRC have specifically catered for this situation and I should not do it.

Not sure why it shouldn’t be allowed though.  I make significant pension contributions knowing I have savings in reserve to handle any unexpected expenses.  So having those savings allows me to contribute a higher level of pension payments.  I suppose the trigger in HMRC’s eyes would be a significant ramp up in payments into my pension in the last year or two before retiring.

Thanks, JS. 

NoMore

Money is fungible, the TFLS in this case is allowing him to return to the same position he was in before he paid his ISA into Pension.

I'm not saying it will definitely be deemed recycling there's also other conditions that need to be met, but HMRC cover it in their advice (see my previous post).

bjorn_toby_wilde

From the link in NoMore’s post above:

“The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax-relieved, contribution to a registered pension scheme.“

That isn’t what the OP is proposing.