Pension Recycling

NickPoole

I am paying into civil service pension scheme (previously Classic, now Alpha) total service about 29 years – 18.5 in Classic and rest up to current in Alpha (mcloud Option B!)

In Feb 2023 I got promoted and went into 40% tax territory and to mitigate this started an AVC (initially 10% of salary) – increased this to 15% and then 20% by end of Mar 24 but still strayed into 40% tax territory and ended up having to pay extra tax on savings interest (no biggie but meant I wanted to avoid that subsequently!)

In 2024/2025 tax year I kept AVC rate at 20% but in March 2025 turned 66 claimed state pension and to avoid 40% tax doubled AVC contribution to 40% from April 2025

Also transferred some of my AVC to drawdown to £5250 as tax free cash but no income. Continued to pay into AVC at 40% of salary

In July2025 I plan to partially retire and take some pension – my salary will reduce by 20% and to keep AVC payment approx. the same will increase contribution rate to approx. 50/55%

I will take all my accrued alpha pension with no tax free cash .

Here’s my problem though – I was also intending to take 16 years worth of classic pension which would offset the 20% salary cut as well as 3xthat as tax free lump sum.  As my taxable income with alpha pension would be higher again I was going to up my AVC contribution again (to about 78% of revised lower salary).

But now, looking again, that would take me right into “recycling” rules – if I take the standard tax free lump sum that would be about £39K and with lots of increases in AVCs (including starting it!) in previous 2 tax years it would meet all the HMRC recycling flags even though I am actually just using income that would otherwise get taxed at 40%!

I can postpone taking the classic pension till 2027/2028 tax year to avoid that but that takes away all my flexibility to fully retire before that if I want or take advantage of any redundancy scheme that crops up.

I suppose I could ask HMRC advise but I have a feeling they will just tell me all the things that indicate recycling. The fact that it looks like recycling doesn’t mean it is!

Any thoughts? 

Marcon

NickPoole said:

I am paying into civil service pension scheme (previously Classic, now Alpha) total service about 29 years – 18.5 in Classic and rest up to current in Alpha (mcloud Option B!)

In Feb 2023 I got promoted and went into 40% tax territory and to mitigate this started an AVC (initially 10% of salary) – increased this to 15% and then 20% by end of Mar 24 but still strayed into 40% tax territory and ended up having to pay extra tax on savings interest (no biggie but meant I wanted to avoid that subsequently!)

In 2024/2025 tax year I kept AVC rate at 20% but in March 2025 turned 66 claimed state pension and to avoid 40% tax doubled AVC contribution to 40% from April 2025

Also transferred some of my AVC to drawdown to £5250 as tax free cash but no income. Continued to pay into AVC at 40% of salary

In July2025 I plan to partially retire and take some pension – my salary will reduce by 20% and to keep AVC payment approx. the same will increase contribution rate to approx. 50/55%

I will take all my accrued alpha pension with no tax free cash .

Here’s my problem though – I was also intending to take 16 years worth of classic pension which would offset the 20% salary cut as well as 3xthat as tax free lump sum.  As my taxable income with alpha pension would be higher again I was going to up my AVC contribution again (to about 78% of revised lower salary).

But now, looking again, that would take me right into “recycling” rules – if I take the standard tax free lump sum that would be about £39K and with lots of increases in AVCs (including starting it!) in previous 2 tax years it would meet all the HMRC recycling flags even though I am actually just using income that would otherwise get taxed at 40%!

I can postpone taking the classic pension till 2027/2028 tax year to avoid that but that takes away all my flexibility to fully retire before that if I want or take advantage of any redundancy scheme that crops up.

I suppose I could ask HMRC advise but I have a feeling they will just tell me all the things that indicate recycling. The fact that it looks like recycling doesn’t mean it is!

Any thoughts? 

Got it in one!

Nobody - including the most competent and well-informed adviser - is going to give you a cast iron guarantee that HMRC won't take a pop at you. There are no statistics available under Freedom of Information, because HMRC play the card that it is too costly to answer any questions about the number of people affected by recycling, because they have no central records covering this particular aspect of things.

The get out of jail card for many people is that the onus is on HMRC to demonstrate that an individual took tax free cash and 'pre-planned' to do so in order to recycle, thus getting two lots of tax advantage.

GunJack

Personally I think HMRC should discount any pcls that is baked into a dB scheme from the recycling test...it's not like you're taking it on purpose, whereas I see the need for DC schemes as the tfls is all down to personal choice. 

Marcon

GunJack said:

Personally I think HMRC should discount any pcls that is baked into a dB scheme from the recycling test...it's not like you're taking it on purpose, whereas I see the need for DC schemes as the tfls is all down to personal choice. 

It would be interesting to know if they do precisely that. They'd be hard pressed to demonstrate that someone taking their DB pension at a scheme's normal retirement age (especially if there is no late retirement factor), and with an automatic PCLS (and no reverse/inverse commutation option) is hell bent on recycling...

NickPoole

The Classic part of my pension comes with a "standard" lump sum of 3 times the pension (so about £45K in my case) - but there is the option to either commute the pension and take larger lump sum, or if you want give up some of the lump sum for pension, but the latter requires some work to find out the sums.

I think to be safe I'll finally retire in May 2027 so that the 2 tax years previous (2025/26 and 26/27) have more or less equal AVC contributions and recycling is off the table. Bit mad to have to do that just to  avoid the appearance of recycling. I suppose the other thing is to keep a record of exactly what I do with any money I get but HMRC could still argue that it could still have affected how I use my present savings knowing I would get lump sum.

Can't help feeling that if I am staying within the contribution limits (100% salary or £60K) with ability to use unused allowance from previous year or so is all that is really required to prevent industrial scale recycling.

NickPoole

One last thought (really just thinking this through, I suppose) - there's the normal pension planning thing. Was my AVC contribution consistent with plan or was it boosted by tax free cash from a pension.

So...MY AVC contributions have been:

Initially any salary over c£50K to avoid 40% tax and build pension pot (aiming to keep £3K - £3.5K per month net per month and have enough to maintain that after retirement for a good few years.

age 66 Increased that to salary plus state pension over c£50K to avoid 40% tax and build pot

next plan was at partial retirement to increase AVC contribution to reduced salary (80%) plus state pension plus CS pension(s) - this would take my contributions up to nearly 80% of salary but still within limits and I would still be taking home the same approx £3.5K per month, which is all I really need.

So the tax free lumps are completely irrelevant to this - mostly going into ISAs, holiday (and retirement party!)

But is the ability to show the plan I was following hadn't been influenced by TFC enough to keep me out of jail (or at least a big tax charge)?

I suppose your guess is as good as mine. 

NickPoole

At least it all gives me a clear final retirement date (April or May 2027)!

GunJack

Marcon said:

GunJack said:

Personally I think HMRC should discount any pcls that is baked into a dB scheme from the recycling test...it's not like you're taking it on purpose, whereas I see the need for DC schemes as the tfls is all down to personal choice. 

It would be interesting to know if they do precisely that. They'd be hard pressed to demonstrate that someone taking their DB pension at a scheme's normal retirement age (especially if there is no late retirement factor), and with an automatic PCLS (and no reverse/inverse commutation option) is hell bent on recycling...

Exactly, and those of us with deferred PCSPS DB but still working past 60 (NPA) in a non-cs job would be increasing pension contributions as a matter of course until final retirement at 6x yrs old, just to take into account the CS pension income never mind the lump sum. 

I'm in this situation, and from 60-62 I'll be increasing my current scheme conts to soak up the extra pension income. No recycling of PCLS going on, that'll still be in the bank if they want to look at it 🤣🤣🤣🤣

NickPoole

I've had a look at the guidelines again and I now think I'm making a mountain out of a molehill (extract as below) - Since I am not using any lump sum to fund contributions I can't have planned to do so, and basically you can't prove something that simply hasn't happened! The worst that can happen is I have to explain my retirement plan, which may be a bit stupid but it doesn't involve recycling tax free cash!

Quote:

The recycling rule is not intended to apply to individuals who simply increase contributions to registered pension schemes (or who have increased contributions paid in respect of them, such as by way of salary or redundancy sacrifice) with the intention of increasing the benefits that will ultimately be paid from those schemes, particularly a pension commencement lump sum. This is provided no pension commencement lump sum is actually used as the means to increase those contributions, whether in a direct or indirect way. This is because the recycling rule applies only where contributions are significantly increased ‘because of’ the lump sum.

The recycling rule does not apply where an individual takes a pension commencement lump sum and, when taking that lump sum, had no intention of using the lump sum as a means, whether directly or indirectly, to pay contributions into a registered pension scheme. This is because the recycling rule applies only where the recycling was planned before the first relevant transaction.