Will I breach HMRC pension recycling rules

disgruntled1234

Back in August of last year, my divorce was finalised and as part of that divorce, my ex-wife received 22% of my pension as part of a pension sharing order.  I decided to increase my contribution into my company pension scheme (salary sacrifice) from 5% to 50% to try and put back some of the money that I lost in the divorce.  

I earn just over £60,000 per year and I'm more than able to live of what I take home.  I want to continue contributing 50% for as long as possible (unless I need additional income in the future at which point I would drop back to a lower percentage) and don't plan on retiring until I'm closer to 60 (I'm currently 55, 56 this year).

I have recently taken £7,500 tax free from my pension as per what I believe to be within the limits of the pension recycling rules and I've put that into my stocks and shares ISA.  The charges and choice of funds is the same in both my SIPP and ISA so all I've done is move money sideways.

Obviously the other 75% (£22,500) was then moved into a drawdown account and I don't intend touching this until after I retire.

I'm now thinking that as I come to the end of the current tax year, I'd like to use some more of my tax free allowance to top up my ISA (around £4,500) and then possibly next tax year, withdraw a further £20,000 to again top up my ISA in that tax year.

Like a lot of people with similar questions around this issue, I've yet to find a definitive answer.

I'm not using any of the tax free money I'm taking out of my pension to put it back in so I don't believe I've breached any rules, but would appreciate someone giving me their opinion

crv1963

If I understand you correctly you are taking the 25% Tax Free Lump Sum of the 30k you contribute each year and then deposit this in an ISA using the same investment choices? You're not putting any of what has been taken from the pension back into any sort of pension? If that is correct then I do not see how you can be accused of recycling.

if this is correct then I also struggle to understand the logic - why not just leave in the pension wrapper? Or are you future proofing by having a sum that will provide a tax free income when you do retire?

SVaz

According to the ‘rules’ ,  if you increased your contributions within 2 ( I think) years either side in order to ‘recycle’ then you can fall foul.

OP has a good reason to have increased,  so no recycling ‘intent’.   Plus, they’ve never actually gone after anyone for recycling, so there’s that. 

A few years ago, I took £20k tfc then upped my workplace contributions by £5k due to a large pay rise. They stayed that way until I became self employed and are now somewhere in between. 

pterri

Am I missing something? If you’ve withdrawn SIPP money (to add to an ISA or whatever) then you’ve triggered the MPAA limit? 

SVaz

Not if it’s only tax free cash

disgruntled1234

crv1963 said:

If I understand you correctly you are taking the 25% Tax Free Lump Sum of the 30k you contribute each year and then deposit this in an ISA using the same investment choices? You're not putting any of what has been taken from the pension back into any sort of pension? If that is correct then I do not see how you can be accused of recycling.

if this is correct then I also struggle to understand the logic - why not just leave in the pension wrapper? Or are you future proofing by having a sum that will provide a tax free income when you do retire?

That's correct.  I'm not using any of the tax free lump sum to pay back into my pension.  My concerns were around increasing my contribution from 5% to 50% around 6 months ago and then taking tax free lump sums out of my pension.

My reasoning for doing this is that I would rather have the money in my stocks and shares ISA as it gives me more flexibility, for example if I needed a large sum of money, I could easily sell shares and withdraw the cash without any tax implications.

I see money in a pension as being "tied up" somewhat and that's the main reason, really.  I would be no worse off if I didn't touch my ISA as the funds and charges are the same in my ISA, SIPP (and also in the draw-down account) and so the money would continue to grow the same as if it was still invested in my SIPP.

Thank you for your reply

disgruntled1234

SVaz said:

According to the ‘rules’ ,  if you increased your contributions within 2 ( I think) years either side in order to ‘recycle’ then you can fall foul.

OP has a good reason to have increased,  so no recycling ‘intent’.   Plus, they’ve never actually gone after anyone for recycling, so there’s that. 

A few years ago, I took £20k tfc then upped my workplace contributions by £5k due to a large pay rise. They stayed that way until I became self employed and are now somewhere in between. 

Your first point is what concerned me.  My intention was to always increase my pension contributions but I was intentionally keeping them at around 5% because it would mean my ex-wife would receive an even larger share of my pension.  As soon as the pension sharing order was done and dusted and the money left my SIPP, I increased my contribution to 50%, which I intend to keep it at until I retire in many 3-4 years time.

The house I shared with my ex is also on the market and so I will receive just under half the value of that when it's sold. I may need access to additional money to buy somewhere in the future so I could potentially look to use some of my tax free cash for that.

Again, like a lot of people on this forum, maybe I'm overthinking things and worrying unnecessarily!

Thank you for your reply

disgruntled1234

pterri said:

Am I missing something? If you’ve withdrawn SIPP money (to add to an ISA or whatever) then you’ve triggered the MPAA limit? 

I'm only withdrawing the 25% tax free.  The other 75% goes into a draw-down account.  MPAA is only triggered, I believe, if I start taking money out of the drawdown account and at that point, it would be classed as taxable income.

Dazed_and_C0nfused

disgruntled1234 said:

pterri said:

Am I missing something? If you’ve withdrawn SIPP money (to add to an ISA or whatever) then you’ve triggered the MPAA limit? 

I'm only withdrawing the 25% tax free.  The other 75% goes into a draw-down account.  MPAA is only triggered, I believe, if I start taking money out of the drawdown account and at that point, it would be classed as taxable income.

I presume you realise that by doing this you are turning the entire 75%, including any investment returns, into taxable income when withdrawn from the pension?

Say you crystallise £30,000.  You take the full £7,500 TFLS and leave the taxable element of £22,500 in the pension.

Over the next few years that £22,500 remains invested and grows to say £33,000.  That whole £33,000 is now going to be taxable when you take it out of the pension wrapper.

disgruntled1234

My thinking is that the money will grow in either my SIPP or the drawdown account.  When I do start to think about taking income from the drawdown account, I would only be drawing 14-15k per annum so would only pay tax on anything above my personal allowance.  My stocks and shares ISA currently yields about the same as my SIPP and so I’d be taking a similar amount from that, which is tax free.  I also want to try and top up my ISA each year as long as possible.  

I’m also planning on continuing to contribute 50% of my salary into my pension so my SIPP will continue to grow until I decide to retire or at least reduce my hours closer to 60.