Tax free lump sum pension recycling rules

flightdeck

Hi there - looking for some insights and opinions from people who have encountered similar to the situation I find myself in. I am on the cusp of retiring at 60 and have just taken a significant tax free lump sum from my pension pot but have not triggered the MPAA as I haven’t taken any of the Taxable remainder which is now crystallised and in a drawdown account. As part of my retirement planning I have reduced my working days to 2 days per week so believe I’m still eligible to pay up to 100% of salary to a pension. My previous 2 years pension contribution were maxed out at £60k and due to my reduced working hours, the maximum I can pay this year will be a lot less than this due to the 100% of Salary cap. I am fortunate to have sufficient cash funds in savings to fund a payment to pension so don’t necessarily need to use any of the tax free sum to do so (Although I appreciate that HMRC won’t necessarily take this into account for assessing any Recycling rules breech). So I plan to make pension contributions this year made up of salary sacrifice, employer contribution and one off AVC to various pension plans for which the total contributions this year will be within my 100% of salary allowance and around 40% less than my last 2 years contributions. Also the total contributions I will make to pensions this year is below 30% of the Tax Free Lump sum I have withdrawn. If my understanding of the Tax Free Lump Sum pension Recycling rules is sound, i believe this approach would not trigger a breech of the rules and is allowable. Would appreciate views, opinions and anyone’s similar experience please - many thanks in advance.

leosayer

I assume you know that you can't sacrifice 100% of your salary due to minimum wage rules.

I also assume you haven read the many other posts on this forum around the recycling rules and how none of us are aware of any cases being brough by HMRC so you won't get the comfort you are after.

In my opinion you should forget about the specific measurable tests for recycling and instead consider the pre-planning aspect.

You haven't stated why you are making such large pension contributions - you have only spoken about wanting to avoid a breach of the recycling rules. 

In my opinion, if you don't have a motivation or scheme for recycling then it's hard to see how HMRC could come after you.

flightdeck

Thanks Leo, I have been able to make maximum payments to my pension over the last few years because I’ve been a high enough earner to reach the max from a combination of Employee Contributions, Employer Contributions and Bonus Sacrifice via payroll. Now I have significantly reduced my hours my earnings have also significantly reduced and now my annual maximum pension contributions are capped by my salary vs the £60k limit. As I’m still working and contributing to a workplace pension to while my employer also continues to contribute, the amount paid in will be well short of my maximum allowance based on my salary. I therefore want to top up the difference via a one off AVC to maximise my Pension allowances this year. As I said , I plan to use existing savings to do so but having just triggered my tax free lump sum payment am conscious of the recycling rules. So when I look at the recycling rules and conditions, I don’t believe that condition 3 & 4 are met as my total contribution to pensions this year will be less than I have paid in previous years and also the total contribution to pensions this year will be less than 30% of the tax free lump sum I took - hope that clarifies.

Albermarle

I can not give you a legal opinion, but as you have been contributing a lot more to your pension in many previous years, than you will this year, I would be surprised if that could bring recycling into play.

Cobbler_tone

They are capped by your earnings and the £60k limit. So the max is your salary. i.e. if you earning £60k you can put £60k in, including your company contributions. You can’t put in more than you earn, some of which you’ll put in yourself.
I’d check that rule out before getting wrapped up in recycling rules.

flightdeck

Thanks Cobbler - I’m clear on than - hence why this years contributions will be less than £60k as in previous years as my reduced salary is now below £60k

flightdeck

Albermarle said:

I can not give you a legal opinion, but as you have been contributing a lot more to your pension in many previous years, than you will this year, I would be surprised if that could bring recycling into play.

That’s what I assume also

Cobbler_tone

flightdeck said:

Thanks Cobbler - I’m clear on than - hence why this years contributions will be less than £60k as in previous years as my reduced salary is now below £60k

I don’t see an issue to contribute 100% of your earnings then. Especially if using savings and if you keep your lump sum separate you have a belt and braces audit trail if ever needed.

phlebas192

flightdeck said:

Thanks Cobbler - I’m clear on than - hence why this years contributions will be less than £60k as in previous years as my reduced salary is now below £60k

I believe that HMRC actually looks at a 5 year window - 2 years prior to taking the lump sum, the year you take it and the 2 years after. If the average of this is more than 30% of the prior contributions then it might be an issue. This is from https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/ which is the sum of my knowledge on the issue!

flightdeck

phlebas192 said:

flightdeck said:

Thanks Cobbler - I’m clear on than - hence why this years contributions will be less than £60k as in previous years as my reduced salary is now below £60k

I believe that HMRC actually looks at a 5 year window - 2 years prior to taking the lump sum, the year you take it and the 2 years after. If the average of this is more than 30% of the prior contributions then it might be an issue. This is from adviser.royallondon which is the sum of my knowledge on the issue!

Yes your correct but as my current and potentially next years contributions will be less than the 2 years prior contributions I believe that still won’t trigger a breech of the rules.