Pension Recycling Rules 30% Limit

TarzanTheThird

Hi, I'm hoping someone can help me with this.

I withdrew max tax free lump sums from 2 pensions a few months ago - a defined benefit and a defined contribution (SIPP). I was planning to retire or at least semi retire. The amount was more than £7500 for both withdrawals.

I decided to go for one last working opportunity: which has given me an option to put money earned from that into my SIPP pension. Recycling rules are complicated. This absolutely was not pre-planned - but how could I prove that?

So I was looking at the 30% rule. Which says something along the lines of: if you put more than 30% of what you took out back in, it counts as recycling (as far as that rule is concerned)

So, if I put in 29% of my tax free lump sum I'm safe - right?

Except, I withdrew 2 lump sums from 2 different pensions. Is that 30% applicable to each withdrawal or the cumulative total?

Getting this wrong could cost cost me far more than I potentially gain from it, so will only do this if very sure.

I also read that nobody has ever actually been fined for pension recycling, so risk is very low even if guilty of it.

Help please - anyone who is familiar with this 30% rule, or better still has direct experience of a similar situation?
 

ClashCityRocker1

I decided to go for one last working opportunity: which has given me an option to put money earned from that into my SIPP pension. Recycling rules are complicated. This absolutely was not pre-planned - but how could I prove that?

I don't think you have to prove it. Just explain (if asked) what the plan was initially and what changed.

TarzanTheThird

ClashCityRocker1 said:

I decided to go for one last working opportunity: which has given me an option to put money earned from that into my SIPP pension. Recycling rules are complicated. This absolutely was not pre-planned - but how could I prove that?

I don't think you have to prove it. Just explain (if asked) what the plan was initially and what changed.

Thanks. It just all feels a bit odd. Surely, even if you were deliberately doing pre-planned recycling you would simply not be honest in that situation. E.g. "I planned to live on it but changed my mind and am looking for another job so decided to put it all back in" or even "I though the tax free rate would be removed so withdrew, now I know it's not I want to put it back in" - not pre-planned as I thought that situation would never occur.

Maybe I am overthinking it

Marcon

TarzanTheThird said:

ClashCityRocker1 said:

I decided to go for one last working opportunity: which has given me an option to put money earned from that into my SIPP pension. Recycling rules are complicated. This absolutely was not pre-planned - but how could I prove that?

I don't think you have to prove it. Just explain (if asked) what the plan was initially and what changed.

Thanks. It just all feels a bit odd. Surely, even if you were deliberately doing pre-planned recycling you would simply not be honest in that situation. E.g. "I planned to live on it but changed my mind and am looking for another job so decided to put it all back in" or even "I though the tax free rate would be removed so withdrew, now I know it's not I want to put it back in" - not pre-planned as I thought that situation would never occur.

Maybe I am overthinking it

I think you probably are overthinking it - but it's easy to understand why, in the absence of any really good and reliable information about how zealously HMRC pursues the issue. There are no statistics, because a request under FOI (more than one person has tried) gets the response that it would be disproportionately expensive to provide the information because it would involved examining cases on a one by one basis.

I don't know where you read that nobody has ever been fined, but whoever made that claim (unless it was HMRC, which somehow I doubt!) won't have had anything on which to base that assertion. I'm not aware that there have been any tax tribunal or court proceedings reported, but that doesn't mean people haven't been penalised by HMRC for recycling.

The good news is that it is for HMRC to prove intent, rather than you having to disprove. That's not a guarantee you won't be challenged (you don't give any indication of the amount you are planning to pay to your SIPP) but if you behave sensibly and honestly, it looks like one of the lesser risks in life.

leosayer

The HMRC provide an overview of recycling which includes this passage:

"The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax-relieved, contribution to a registered pension scheme."

Such wording implies the creation of an avoidance scheme.

I see nothing 'systematic' about what you propose. 

Pat38493

Marcon said:

TarzanTheThird said:

ClashCityRocker1 said:

I decided to go for one last working opportunity: which has given me an option to put money earned from that into my SIPP pension. Recycling rules are complicated. This absolutely was not pre-planned - but how could I prove that?

I don't think you have to prove it. Just explain (if asked) what the plan was initially and what changed.

Thanks. It just all feels a bit odd. Surely, even if you were deliberately doing pre-planned recycling you would simply not be honest in that situation. E.g. "I planned to live on it but changed my mind and am looking for another job so decided to put it all back in" or even "I though the tax free rate would be removed so withdrew, now I know it's not I want to put it back in" - not pre-planned as I thought that situation would never occur.

Maybe I am overthinking it

I think you probably are overthinking it - but it's easy to understand why, in the absence of any really good and reliable information about how zealously HMRC pursues the issue. There are no statistics, because a request under FOI (more than one person has tried) gets the response that it would be disproportionately expensive to provide the information because it would involved examining cases on a one by one basis.

I don't know where you read that nobody has ever been fined, but whoever made that claim (unless it was HMRC, which somehow I doubt!) won't have had anything on which to base that assertion. I'm not aware that there have been any tax tribunal or court proceedings reported, but that doesn't mean people haven't been penalised by HMRC for recycling.

The good news is that it is for HMRC to prove intent, rather than you having to disprove. That's not a guarantee you won't be challenged (you don't give any indication of the amount you are planning to pay to your SIPP) but if you behave sensibly and honestly, it looks like one of the lesser risks in life.

True but I would think that if HMRC was fining people for recycling on a regular basis in large numbers, you would be able to find some posts on internet boards of one kind or another from people asking if they could challenge it or suchlike - nobody ever seems to be able to find anything like this. 

There was also someone here a year or two back who posted links to the original parliament hansard references about when this legislation was introduced, and it was stated that this was only supposed to be used for large scale avoidance schemes, not to penalise individuals.  The rule about pre-planning seems to reinforce this a bit because as discussed many times on these boards, it's very hard to prove or disprove the pre-planning part.

As regard the OP - from what I can see this doesn't seem to be pre-planned because they OP changed their mind after taking the TFC.  I suppose it's also helpful if the offer for the "last working opportunity" was dated after you took the TFC.

TarzanTheThird

Re: "As regard the OP - from what I can see this doesn't seem to be pre-planned because they OP changed their mind after taking the TFC.  I suppose it's also helpful if the offer for the "last working opportunity" was dated after you took the TFC."

Sadly not. The dates of the actual money hitting my bank line up almost exactly. First TFLS mid Oct, Second TFLS mid Nov. Both requested c 4-6 weeks before that. New opportunity start date 28th Sept. I had assumed you could not pay in to a pension at all after drawing TFLS until researching. It's an unfortunate coincidence, but deliberate pre-planned event would look exactly the same. 

Pat38493

TarzanTheThird said:

Re: "As regard the OP - from what I can see this doesn't seem to be pre-planned because they OP changed their mind after taking the TFC.  I suppose it's also helpful if the offer for the "last working opportunity" was dated after you took the TFC."

Sadly not. The dates of the actual money hitting my bank line up almost exactly. First TFLS mid Oct, Second TFLS mid Nov. Both requested c 4-6 weeks before that. New opportunity start date 28th Sept. I had assumed you could not pay in to a pension at all after drawing TFLS until researching. It's an unfortunate coincidence, but deliberate pre-planned event would look exactly the same. 

OK but was the date that you agreed to take on the additional work opportunity after the date that you put in the request for the TFC, or did you already accept that work opportunity before you requested the TFC?

Also - are you self employed and you are making a proactive decision to put money in the pension, or is this an employment contract where you will be put into the pension scheme unless you opt out?   If it's the former, you can't really argue that the pension contribution was an inadvertent result of the employment that you took as you are actively doing that.  

If you are doing it to avoid a higher tax band on your income in the current year by making a pension contribution, to me that is valid tax planning and should be a valid reason.

Keep in mind that there are 5 or 6 recycling rules, and for recycling to have occured, all of the rules must be met - if even one rule is not met, there is no recycling.  There is also a rule that says the pension contributions should not be 30% more than "what would otherwise have been expected" - again, this is going to be very hard to prove, but if you took on an additional work opportunity and made additional income, it would be reasonable to assume you would make additional pension contributions, especially if your living expenses are already covered.

Another sniff test would be - would you be able to make the pension contributions on this new work opportunity even if you had not taken the TFC amounts?  If so it's again going to very hard for HMRC to claim recycling.

If you want to play it really safe, only put back in 29% of the smaller TFC withdrawal - there was a thread on here a long time ago where someone claimed that if you take 2 withdrawals in the same year it's the smaller one that would be used for the 30% rule, but they didn't provide any backup or evidence that HMRC had ever said this - they were extrapolating from one of the examples on the HMRC web site, but there are other examples which you could interpret the opposite.

However personally if it was me I would not worry about it - I suspect I breached the 30% rule in my last year of working but I was not trying to "min/max" the tax relief so I doubt HMRC will have any issue.

Also regarding the pre-planning rule, I would guess that if you told other people (spouse, family, friends or whatever) that you were stopping work, and that you then changed your mind after requesting TFC withdrawals and the timing lines up, HMRC can't disprove that as it's the truth.

Unfortunately as pointed out above, there is no actual UK case law or public information about specific examples where people were fined or not fined, so it's impossible to say with 100% certainty but in the situation you describe, I would just go ahead.

One final point is that, due to the overall lifetime TFC limit of £268K, the amount of money that an individual person could make even if they were taking the michael with recycling is not that big as the law of passing time and diminishing returns will kick in - for each round of recycling you could only recycle 25% of the prior round, so you would very quickly reach negligable amounts.

Albermarle

leosayer said:

The HMRC provide an overview of recycling which includes this passage:

"The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax-relieved, contribution to a registered pension scheme."

Such wording implies the creation of an avoidance scheme.

I see nothing 'systematic' about what you propose. 

I think the original rules were put in place because there had been some large scale systematic exploitation by organised groups ( I do not know the detail though). 
Possibly they have been left in place also as a general deterrent, as taking TFC and then adding it back to a pension even on a small scale, is not in the spirit of why tax relief is offered as a benefit. So leaving the recycling rules in place but not pursuing people very much, if at all, will still presumably act as a barrier to people tempted to overdo it. 
Appreciate that many people do not do it deliberately, but still it does mean two bites at the tax relief cherry whether planned or not.