Adding one off sum to SIPP same tax year as taking TFC ???

MetaPhysical

Hi I am a 40% tax payer and I am retiring in December.  I will have earned about £50k in income in the 8 months of the tax year prior to retiring.  I will have made about £10k of pension contributions in that time and so have plenty of remaining allowance and have sufficient earnings.  I have no plans of returning to work and adding more pension contributions.

I am sitting on some cash in my bank account.  My question.  Is there anything to prevent me adding, for example,  £20k of my own cash into my pension into a "safe" MM fund to which I'd then get an immediate £4k of tax relief (with a further £4k next year on my SA), and then taking a TFC lump sum when I retire in December?

So £20k would turn into £28 doing this and I can take 25% of £24k tax free.  Am I missing anything?

Many thanks.

Marcon

MetaPhysical said:

Hi I am a 40% tax payer and I am retiring in December.  I will have earned about £50k in income in the 8 months of the tax year prior to retiring.  I will have made about £10k of pension contributions in that time and so have plenty of remaining allowance and have sufficient earnings.  I have no plans of returning to work and adding more pension contributions.

I am sitting on some cash in my bank account.  My question.  Is there anything to prevent me adding, for example,  £20k of my own cash into my pension into a "safe" MM fund to which I'd then get an immediate £4k of tax relief (with a further £4k next year on my SA), and then taking a TFC lump sum when I retire in December?

So £20k would turn into £28 doing this and I can take 25% of £24k tax free.  Am I missing anything?

Many thanks.

A spot of NI saving if you can add some of the 'extra' by means of salary sacrifice?

Keep in mind the recycling rules: https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/ They apply when you are 'about' to receive a tax free lump sum, so making a bumper contribution a few months beforehand is no guarantee of avoiding being caught by the rules. Frustratingly, nobody can tell you whether you will or won't be caught; there are no statistics available (HMRC's response to a FOI request was to decline it because it would be too costly to provide the information, as they have no sort of register or record of these cases and each one would need to be examined individually).

squirrelpie

Marcon said:

Keep in mind the recycling rules

He's not proposing to recycle anything though, is he?

MetaPhysical

squirrelpie said:

Marcon said:

Keep in mind the recycling rules

He's not proposing to recycle anything though, is he?

No, I'm not.  I'm just proposing to add some money to my pension from my own resources - this money that I will add is not from any other pension, it is my own savings out of my income.

Albermarle

squirrelpie said:

Marcon said:

Keep in mind the recycling rules

He's not proposing to recycle anything though, is he?

I think it depends on the actual amounts involved.
If for example you normally add £5K a year to your pension, but then add £50K this year and then later in the year take a tax free sum of say £80K. In this case in theory at least it could be said you made the extra much larger contribution based on the expectation of getting the TFC.

Linton

The Tax Manual indicates that the basis for considering a transaction as "recycling" is whether the TFLS was taken with the intention of increasing pension contributions beyond what would otherwise be made and hence gaining a double helping of TFLS.  The wording in the OP suggests to me that this is precisely why the TFLS would be taken.

There are a number of examples given in the Tax Manual of what could be considered recycling and what may not and exemptions for triviality.  However exactly what it all means in practical situations in unclear and would presumably only be clarified were the matter to go to the courts.  As far as has been reported on this forum or by searches on the net there have never been any test cases on recycling, not even any real examples of the issue occuring in reality..  Fancy being the first test case?

If the OP has no intention of recyclling why take the TFLS at all? It would appear that the OP does not need the cash.

Isthisforreal99

OP - will you have any further taxable income in 25/26? You mention £50k income at December 2025 but unless you have any further income in the year you will not be a 40% taxpayer overall and no further 20% tax relief will be due. (Assuming not in Scotland).

Either way you will only get higher rate relief up to the amount you have actually paid 40% tax on.

Marcon

MetaPhysical said:

squirrelpie said:

Marcon said:

Keep in mind the recycling rules

He's not proposing to recycle anything though, is he?

No, I'm not.  I'm just proposing to add some money to my pension from my own resources - this money that I will add is not from any other pension, it is my own savings out of my income.

...but you are then proposing to take a tax free lump sum shortly afterwards (a point I made in my post above, which you and squirrel have both overlooked), which has the potential to be caught by the recycling rules. As Linton says:

Linton said:

If the OP has no intention of recyclling why take the TFLS at all? It would appear that the OP does not need the cash.

ColdIron

MetaPhysical said:

£20k of my own cash into my pension into a "safe" MM fund to which I'd then get an immediate £4k of tax relief

Perhaps I haven't woken up yet but I make that £5,000

(with a further £4k next year on my SA), and then taking a TFC lump sum when I retire in December?

Remember that you only get higher rate relief to the extent that you've pad tax at that rate. You say 'will have earned about £50k in income in the 8 months of the tax year prior to retiring' but I make that a shade under £50,270 so no scope for relief that I can see

Albermarle

Remember that you only get higher rate relief to the extent that you've pad tax at that rate. You say 'will have earned about £50k in income in the 8 months of the tax year prior to retiring' but I make that a shade under £50,270 so no scope for relief that I can see

If the OP will earn £50K in 8 months, their annual salary will be around £75K, so most likely they will be paying some 40% tax each month until they retire in December.
They maybe be thinking because they have paid some 40% tax then they can claim some 40% tax relief.
However you are correct of course that they can not claim higher rate relief if their salary over the year is only £50K.
On the other side any 40% tax they have paid will be refunded at some point.