Concerned about possible pension recycling – Hope I am overthinking this?

jones714

Hello all.

I’m getting myself into a bit of a muddle over the pension recycling rules and would really appreciate a sense-check to see if my worries are justified.

I’ve accepted an unexpected voluntary severance offer and now plan to take early retirement and access my workplace pension on 1 January 2026. My original goal was to retire in May 2028 (just over 60), but after years of moving goalposts and poor management, I decided enough was enough!

My workplace pension is a DB scheme dating back to 2007, with a DC “pension builder” pot attached for additional contributions. I’ve been making regular extra DC contributions via salary sacrifice since 2020/21, increasing the amount over time to build up as much as possible.

I also opened a SIPP in 2023/24 using £10k cash savings and added a smaller top-up of £6k  in 2024/25. The plan was for this to be a second pot that could grow and be used later on, once I’d drawn down some of my tax-free cash and need more money

My concern now is the pension recycling rules, particularly the bit that says a breach can occur if “the cumulative total of increases in pension payments in the tax year, and the two tax years either side (five tax years in total), is at least 30% of the tax-free cash taken.”

What actually counts as an “increase in pension payments”?

As mentioned, I’ve been making regular additional contributions to my workplace DC pot for years – these used to be about £200 per month, but are now £1,000 per month. Does the 30% test look only at the recent increase (i.e. the uplift from £200 to £1,000 plus the SIPP contributions), or everything I’ve paid in? (gulp!)

By my rough maths, I’ve contributed around £43,000 in total across the workplace and SIPP since the start of the 2023/24 tax year -£16k from cash savings, the rest monthly by Salary Sacrifice Thirty per cent of my estimated tax-free lump sum (£130,000) is about £40,000, so I may already over the threshold?

Once I retire in January, I won’t be making any further contributions, so there’ll be nothing added in 2026/27 or 2027/28.

I do realise one key factor is intent — whether the recycling was pre-planned. It wasn’t! I’ve just been saving as much as I could and didn’t expect to retire so soon; the severance offer was simply too good to turn down. The only bit that might look “planned” is roughly £6k contributed via salary since applying for and accepting severance?

Would this risk disappear if I deferred taking my pension until the 2026/27 tax year? By then, my total extra contributions across both schemes in 2024/25 and 2025/26 would be around £28k.combined, with no contributions in 26/27, 27/28 or 28/28

Apologies for the long post — I hope I’ve explained it clearly.

Many thanks in advance for insights!

bjorn_toby_wilde

It’s a long post and somewhat confusing!

The pension recycling rules relate to taking a tax free sum from a pension then reinvesting it, and therefore receiving tax relief again - hence recycling.

I didn’t see you mention anywhere that you have taken tax free cash yet. Have you?

Marcon

Sounds like USS?

It's up to HMRC to demonstrate that recycling is pre-planned. If you've had a VS offer out of the blue, anything which went before clearly couldn't have been pre-planned, so nothing to worry about there.

jones714

bjorn_toby_wilde said:

It’s a long post and somewhat confusing!

The pension recycling rules relate to taking a tax free sum from a pension then reinvesting it, and therefore receiving tax relief again - hence recycling.

I didn’t see you mention anywhere that you have taken tax free cash yet. Have you?

Thanks bjorn_toby_wilde. Sorry for being confusing - I just wanted to give as much info as possible.

I would be taking the cash free tax in Jan.  I'm bothered by HMRC pension tax manual 133830 and in particular the paragraph which relates to cumulative basis and the tax years preceding the tax year in which I will take the lump sum

The period of time is:

• the tax year in which an individual takes a pension commencement lump sum with the intention of using it to make significantly increased contributions to a registered pension scheme
• the 2 tax years immediately preceding the tax year in which the individual took the lump sum
• the 2 tax years immediately following the tax year in which the individual took the lump sum.

Thanks

jones714

Marcon said:

Sounds like USS?

It's up to HMRC to demonstrate that recycling is pre-planned. If you've had a VS offer out of the blue, anything which went before clearly couldn't have been pre-planned, so nothing to worry about there.

very perceptive Marcon!

VS has been open to all staff for a year ahead of restructure, so HMRC might argue say it wasn't out of the blue?? What was unexpected (to me) was to be asked directly in June if I had an interest in going when I was told my role was being deleted in the proposals. Conceited I know but never saw it coming. In fact I had informally been told I'd be OK two weeks earlier. Unis eh?

thanks

GrumpyDil

But still based on pre planning and if you did not expect to get VS this won't fall into pension recycling rules. Interestingly I've been digging around and struggled to find any actual examples of cases where HMRC have enforced cases.

ClashCityRocker1

My own test for this (hardly a legal certainty) is did you change any investment plans because you were getting a tax free lump sum? If not, there wasn't any intent to recycle.

In other words if your plan to stuff your pension pre retirement remained the same throughout but now you have early severance package then HMRC can hardly prove planned recycling because there wasn't any!

I gave up worrying about this when I took partial retirement and got a lump sum at the same time diverted a lot of new pension money into AVCs - I decided I could give a coherent and consistent explanation of my retirement planning throughout if challenged and it would be difficult t come up with a "planned recycling" vesion of events that made any sense!

Anecdotally on this forum I've seen it claimed that regular payments into pensions from salary are ignored for recycling purposes and HMRC are only interested in lump sums paid in. Which makes sense I suppose as as any payment from salary can always be part of normal retirement planning. But I don't know if it is true!

I would just ask myself the question - have I planned to redirect tax free cash into a pension to get tax relief again? If not, you haven't fallen foul of the rules.

Cobbler_tone

GrumpyDil said:

But still based on pre planning and if you did not expect to get VS this won't fall into pension recycling rules. Interestingly I've been digging around and struggled to find any actual examples of cases where HMRC have enforced cases.

I'd be surprised (and always prepared to be surprised) if paying VS into a pension is seen too differently to paying VR into one, or over £30k of it after having the tax free part and subject to allowances. Maybe the difference is that the latter doesn't touch your hands.
As VS needs approving and signing off by a solicitor (certainly with USS) it might be the ideal opportunity to ask if it could be paid straight in?