TFLS/PCLS recycling rules, clarification

justcheckin

Current position:

Me: age 51 currently paying total salary into SIPP
OH: age 50 currently paying c. 55% total of salary and SE earnings into SIPP.

Both SIPPs are accessible at age 55 not 57.

My original aim was for us both to take some of our TFLS as close to our 55th birthdays as possible, however I do not want either of us to fall foul of recycling rules. Plan would be to do the same each year until all of the TFLS amount is exhausted.

Given the high level of current contributions am I right that our reasonably expected contribution amounts are, for me (age 51) the 5 years beginning with tax year 23/24?

And the second part of my question,  providing I keep my contributions stable, my formula to calculate how much I could take tax free whilst keeping my contributions high at 55 is: (total sipp pot *.25)*.25. ?

Edit to add: I am focusing on the 'expected contributions' rule as I believe we would both fail all the other criteria.

I really hope this makes sense!

Scarum

The way I interpret the rules, the 5 year period includes the 2 years before the PCLS (TFLS) is accessed, the year in which it was taken and then the two following years.  If your contributions for all of these 5 years are greater than what they otherwise might have been (for all these 5 years greater than then 30% of the PCLS taken), this is a flag and you may have be seen to have recycled the PCLS.  If the PCLS is £7,500 or less, no problem.

Year -2... Total pension contributions up to earned income

Year -1... Total pension contributions up to earned income

Year 0... Year PCLS (TFLS) taken; Retiring? --> Total pension contributions = up to earned income if retiring mid tax year

Year +1... Still earning? -->Total pension contributions up to earned income, otherwise £10,000, or £3,600 from pension income only (including HMRC 25% income tax rebate)

Year +2... Still earning? -->Total pension contributions up to earned income, otherwise £10,000, or £3,600 from pension income only (including HMRC 25% income tax rebate)

justcheckin

Thanks. We will still be earning at age 55. I thought we could only take 25% of the 25% out?

Dazed_and_C0nfused

justcheckin said:

Thanks. We will still be earning at age 55. I thought we could only take 25% of the 25% out?

Why do you think that?

Will the Lump Sum Allowance (normal maximum tax free amount) of £268k be a factor for you?

justcheckin

I don't think either of us will hit the £268k.

The 25% of 25% was from Scottish Widows and I thought was to escape the 30% criteria? Although I guess that could be 29.5%!

DRS1

justcheckin said:

I don't think either of us will hit the £268k.

The 25% of 25% was from Scottish Widows and I thought was to escape the 30% criteria? Although I guess that could be 29.5%!

I have no clue what you are talking about.

Perhaps look at this
Recycling of tax-free cash - Royal London for advisers

My thinking is that if you don't change your contributions at all then you are not likely to be caught.

Year zero will be when you take the lump sum (2030/1?) so if you contribute £x,000 in every tax year from 25/6 to 32/3 then you will be OK.  The five year period will be 28/9 to 32/3.  But you were contributing x before that period and are still contributing x during that period.  So no problem

And x can increase over the period as long as it is not by more than 30% of the lump sum.  So if you take a lump sum of £100k you want to keep your contributions below £x,000 + £30,000.

chuffinnora

I asked something similar of my previous pension advisor. He told me that pension contributions taken from your regular pay (i.e. monthly) do not get counted or looked at when establishing recycling criteria. Even if they exceed the 30%. Only bulk payments are looked at.

I questioned him several times about this and found that hard to believe. There doesn't seem to be any mention of such an exclusion on the HMRC website. He insisted he was correct and that his company had verified this with HMRC.

Still find it hard to accept, because someone could increase those contributions much higher to recycle. Not that I would risk such a situation, but I wanted to know the rules. This is a respected local pension company, so I can only assume they know their stuff. But still seems odd to me.

ClashCityRocker1

chuffinnora said:

I asked something similar of my previous pension advisor. He told me that pension contributions taken from your regular pay (i.e. monthly) do not get counted or looked at when establishing recycling criteria. Even if they exceed the 30%. Only bulk payments are looked at.

I questioned him several times about this and found that hard to believe. There doesn't seem to be any mention of such an exclusion on the HMRC website. He insisted he was correct and that his company had verified this with HMRC.

Still find it hard to accept, because someone could increase those contributions much higher to recycle. Not that I would risk such a situation, but I wanted to know the rules. This is a respected local pension company, so I can only assume they know their stuff. But still seems odd to me.

I often wondered about that - regular contributions are already limited to being a subset of total pay and there's the annual allowance too so it makes sense. Bit odd that the HMRC goes out of its way to tell you what sort of rise in contributions would raise red flags though.

The other thing that would trigger a problem I suspect is when you take tax free cash, you tick the box that asks if you are recycling any money!

I have worked on the basis that they will ignore my standard lump sum from CS pension and just look at other payments but just to be safe am going to leave 13 months to pass and then only take out £7.5K too

But I am working on no advice except what I find here and on line.

Anyway, sorry - that contributes nothing to your opening question at all so will be shtumm