Accessing DB Pension and increasing Contributions to DC

Fairwinds

@DRS1 - any thoughts on the recycling bit - putting me off at the moment 

Rule 4 might be the saviour upto 30% of tax-free amount  - so if I retire at 62, would that mean i could put in the full 15k per year

Fairwinds

The recycling only seems to apply if it is funded by use of the lump sum - my intention is to fund it out of the additional annual income, not the lump sum - so back to thinking it wouldn't be classed as recycling

NoMore

Fairwinds said:

The recycling only seems to apply if it is funded by use of the lump sum - my intention is to fund it out of the additional annual income, not the lump sum - so back to thinking it wouldn't be classed as recycling

No that's not how it works, money is fungible, it doesn't matter where it comes from to fund, it's if HMRC consider that the lump sum has enabled you to increase contributions, by for example increasing work pension contributions and using the lump sum to replace the lost income, it could be considered recycling. There isn't a simple get out where you can point and say it wasn't directly the lump sum I was using to put in pension. 

Fairwinds

NoMore said:

Fairwinds said:

The recycling only seems to apply if it is funded by use of the lump sum - my intention is to fund it out of the additional annual income, not the lump sum - so back to thinking it wouldn't be classed as recycling

No that's not how it works, money is fungible, it doesn't matter where it comes from to fund, it's if HMRC consider that the lump sum has enabled you to increase contributions, by for example increasing work pension contributions and using the lump sum to replace the lost income, it could be considered recycling. There isn't a simple get out where you can point and say it wasn't directly the lump sum I was using to put in pension. 

Yeh i get that, but I wouldn't be touching the lump sum or savings - but income would also increase by15k if i access pension at 60 - it would be the additional income - not sure how they could then say it was from a lump sum - which does seem to be the test - Idea is to build for 2 years and then retire at 62

DRS1

I think the problem is the recycling rule has not been tested.  It is there but as far as I can tell from posts on here no-one has actually been hit by it (or threatened with it by HMRC).

The only way you could be safe though is by taking no TFLS (and given you seem to have a good commutation rate of 20:1 I can understand that you would not want to do that).

For what it is worth I have applied for an annuity with a TFLS and was asked to sign a declaration including the following

"Where I have chosen to take tax-free cash, it is not my intention to make, either directly, indirectly or by

someone making contributions on my behalf, a significant* increase in my total expected contributions to

registered pension schemes.

*A significant increase is where:

– the total tax-free cash you receive in the 12 month period ending on the day the tax-free cash from this

plan is paid, exceeds £7,500, and

– more than 30% of those tax-free cash sums is used to make contributions (either directly, indirectly

or by someone making contributions on your behalf, such as your employer) to one or more registered

pension schemes over and above the expected level of contributions. This includes any contributions

you may have made in anticipation of receiving the tax-free cash."

Now this may be paraphrasing the recycling rule but if your TFLS is £100k and you only contribute an extra £30k over two years then you could sign that declaration.  Just don't make a third contribution and maybe knock a fiver off to come under the £30k.

As you can see from the reference to the employer making extra contributions on your behalf it is not as simple as saying the source of the extra £30k was clearly NOT the TFLS.

Fairwinds

Would you not agree it would be near impossible to argue and prove that I had used the lump sum as a means to fund ( or replaced savings used to fund) if both remain fully in tact and its from new additional monthly income? But i would still try and make sure it was under 30k

DRS1

Fairwinds said:

Would you not agree it would be near impossible to argue and prove that I had used the lump sum as a means to fund ( or replaced savings used to fund) if both remain fully in tact and its from new additional monthly income? But i would still try and make sure it was under 30k

It is possible to "recycle" a lump sum by making a contribution BEFORE you receive the lump sum.  So just saying but I did not touch the lump sum (or savings) probably wouldn't succeed.  I might think you would probably be OK but what I think does not matter.  I am not a tax inspector.

The best position would be if you took no TFLS.

Next best is keeping the extra contributions just below 30% of the TFLS

Beyond that you are probably just hoping nobody notices or cares.

And bear in mind that with HMRC you are the one doing the proving.  They'll just send out a tax bill (if they think you have crossed the line).  But as I said there seems to be no experience on this point.  No-one really knows where the line is.

GunJack

This whole recycling business is barmy. If you put a tfls into a savings account on receipt of taking a dB pension (especially where the PCLS is baked into the dB, so not "choosing"to take one) and your total income has increased to enable you to up your current DC conts. significantly, the lump sum remains untouched, how can you be accused of recycling the lump sum??

GunJack

Having just re-read the royal London guide it seems not so applicable to dB schemes as it is to DC, but that could just be the way I'm reading it...

DRS1

This quote from the HMRC guidance on recycling may be some comfort:

"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."