Just checking this is ok or fall foul of pension recycling rules?

zAndy1

Is it ok to take a PCLS from a DB pension and use it to pay off debt which then allows you to increase your salary sacrifice payments into your current workplace DC pension? I'd be doubling my contributions so a fairly significant increase and I'm worried it will fall foul of pension recycling rules somehow. It asks me to confirm whether directly or indirectly I won't be using more than 30% of the PCLS to increase pension contributions to one or more registered pension schemes. 30% is about £11k and my pension contributions would increase by about £4k pa so is that ok? 

Thanks

Cobbler_tone

It should be fine and know several people who are doing the same. You are not actually putting the lump sum into the pension and increasing your ability to contribute more via salary sacrifice. 
Without knowing your full situation it sounds like a sensible approach to clear debt and build up your DC pot.

Sarahspangles

zAndy1 said:

Is it ok to take a PCLS from a DB pension and use it to pay off debt which then allows you to increase your salary sacrifice payments into your current workplace DC pension? I'd be doubling my contributions so a fairly significant increase and I'm worried it will fall foul of pension recycling rules somehow. It asks me to confirm whether directly or indirectly I won't be using more than 30% of the PCLS to increase pension contributions to one or more registered pension schemes. 30% is about £11k and my pension contributions would increase by about £4k pa so is that ok? 

Thanks

There’s a flow chart here. While it can’t fully capture everything that HMRC take into consideration, it should help you understand if you’re on thin ice or not. I don’t think you are.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

zAndy1

Sarahspangles said:

zAndy1 said:

Is it ok to take a PCLS from a DB pension and use it to pay off debt which then allows you to increase your salary sacrifice payments into your current workplace DC pension? I'd be doubling my contributions so a fairly significant increase and I'm worried it will fall foul of pension recycling rules somehow. It asks me to confirm whether directly or indirectly I won't be using more than 30% of the PCLS to increase pension contributions to one or more registered pension schemes. 30% is about £11k and my pension contributions would increase by about £4k pa so is that ok? 

Thanks

There’s a flow chart here. While it can’t fully capture everything that HMRC take into consideration, it should help you understand if you’re on thin ice or not. I don’t think you are.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

Thanks for the reply, I see it as being a bit 50/50 really however the intention is not to use the money to increase pension contributions, the only reason for taking the PCLS is to clear debts , a consequence of that will be more disposable income and a consequence of that is that I can increase my pension contributions (and mortgage payments). It would be pretty harsh in my opinion it it did fall foul of the pension recycling rules, I assume it's rule 4 that 'saves' me? 

Sarahspangles

zAndy1 said:

Sarahspangles said:

zAndy1 said:

Is it ok to take a PCLS from a DB pension and use it to pay off debt which then allows you to increase your salary sacrifice payments into your current workplace DC pension? I'd be doubling my contributions so a fairly significant increase and I'm worried it will fall foul of pension recycling rules somehow. It asks me to confirm whether directly or indirectly I won't be using more than 30% of the PCLS to increase pension contributions to one or more registered pension schemes. 30% is about £11k and my pension contributions would increase by about £4k pa so is that ok? 

Thanks

There’s a flow chart here. While it can’t fully capture everything that HMRC take into consideration, it should help you understand if you’re on thin ice or not. I don’t think you are.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

Thanks for the reply, I see it as being a bit 50/50 really however the intention is not to use the money to increase pension contributions, the only reason for taking the PCLS is to clear debts , a consequence of that will be more disposable income and a consequence of that is that I can increase my pension contributions (and mortgage payments). It would be pretty harsh in my opinion it it did fall foul of the pension recycling rules, I assume it's rule 4 that 'saves' me? 

At this point someone usually points out there are no known cases of HMRC taking action against someone for recycling. But it’s desirable to avoid being the first! If you hadn’t been thinking ahead and realised you could contribute more then you would have passed the ‘premeditation’ test. I’m not sure you pass rule 4 but it depends how long you plan to contribute for. It’s calculated over 5 years.

You’re presumably over 55 and may be planning to fully retire relatively soon, but if not and you’re being super cautious you could always stagger your contributions over a longer period. You have ISA allowances to play with as well and remember that you can contribute £2,880 a year to an SIPP even when not earning and receive tax relief. 

westv

zAndy1 said:

Is it ok to take a PCLS from a DB pension and use it to pay off debt which then allows you to increase your salary sacrifice payments into your current workplace DC pension? I'd be doubling my contributions so a fairly significant increase and I'm worried it will fall foul of pension recycling rules somehow. It asks me to confirm whether directly or indirectly I won't be using more than 30% of the PCLS to increase pension contributions to one or more registered pension schemes. 30% is about £11k and my pension contributions would increase by about £4k pa so is that ok? 

Thanks

Who/what asked you?

zAndy1

westv said:

zAndy1 said:

Is it ok to take a PCLS from a DB pension and use it to pay off debt which then allows you to increase your salary sacrifice payments into your current workplace DC pension? I'd be doubling my contributions so a fairly significant increase and I'm worried it will fall foul of pension recycling rules somehow. It asks me to confirm whether directly or indirectly I won't be using more than 30% of the PCLS to increase pension contributions to one or more registered pension schemes. 30% is about £11k and my pension contributions would increase by about £4k pa so is that ok? 

Thanks

Who/what asked you?

The pension commencement lump sum declaration form I have to fill in to start taking my pension which states

'If contributions into a Registered Pension Scheme are deemed to have been “significantly increased” and “pre planning” was involved, this could result in the PCLS being regarded as an Unauthorised Payment which would have significant tax implications for both you and the Trustees. If the Trustees incur a tax charge as a result of such use of a PCLS, they will seek reimbursement of this charge from you. HMRC have produced detailed guidance on this which is available at the following website: www.hmrc.gov.uk/manuals/ptmanual/PTM133810.htm As such, if either of the following situations apply, before we are able to pay your PCLS to you, you must declare that you do not intend to increase, nor have already increased, your contributions to this or other Registered Pension Schemes, in total, by more than 30% of the PCLS. (1) The value of your PCLS from this scheme is over £7,500 Or (2) The aggregate of your PCLS from this scheme and any other PCLSs you may have taken from other arrangements within the 12 months preceeding your retirement date under this scheme is greater than £7,500.
I declare that :
PCLSs I have received in the 12 months preceeding my retirement date under this scheme, when added to the PCLS under this scheme, do not total more than £7,500. And/or** • I do not propose to directly or indirectly use more than 30% of the Pension Commencement Lump Sum from the scheme to increase contributions to one or more Registered Pension Schemes. This includes any contributions I may have made in anticipation of receiving the Pension Commencement Lump Sum.'

disgruntled1234

I went through similar thoughts/worries to you and posted something similar here.

https://forums.moneysavingexpert.com/discussion/6586182/will-i-breach-hmrc-pension-recycling-rules

In summary, after my ex-wife received quite a large percentage of my pension as part of a pension sharing order, I decided to increase my salary sacrifice percentage from 5% to 50%.  I did this from August of last year.  However, as we were approaching the end of this tax year, I decided I wanted to top up my stocks and shares ISA, so took £7,500 task free and then the £22,500 went into my drawdown account.

However, this didn't fill up my ISA completely, and after much deliberation and responses on this forum, I decided to tax another small amount of cash tax free to top up my stocks and shares ISA to the maximum for this tax year.

There was never any intent on my part to do this and I just see this as part of retirement planning. In the last couple of days, I've requested to drop to working 4 days per week and so will most likely reduce my salary sacrifice percentage down to around 35% which will mean my monthly take home pay will remain roughly the same, despite earning 1/5 less in salary.

I'm planning on retiring in the next couple of years, so again, I simply see this as retirement planning.  This time next year, I will more than likely request to drop another day and then maybe when I'm 58, look to retire completely.

None of the tax free cash I've taken has gone back into my pension and I could easily live off my salary having sacrificed 50% of it into my pension from August of last year.

I read numerous articles on this subject and for me, I think it would come down to whether there was ever any planning or intent, which there never was, but circumstances change and no-one can plan for what may change in the future.

LHW99

Any spouse / civil partner around? You could always contribute some to their pot as well as your own.

zAndy1

LHW99 said:

Any spouse / civil partner around? You could always contribute some to their pot as well as your own.

Yes my wife is a teacher in the teachers pension scheme but she's quite a few years off retirement yet (at least 8 and that's if she retires early at 60). Really I want to increase my pension contributions as my current level isn't taking me out of the 40% tax bracket. If I double my contributions combined with a sal sac EV lease it would so that seems the most sensible thing to do really. Will probably also start saving into an ISA as well.