Pension recycling if buying car?

ByondDoubt

Hi,
I have a question on taking part of my tax free cash allowance to buy a car.

The background.
I am still working and sacrificing a significant percentage of my monthly pay to my pension.
In 2022/23 I started to overpay into my pension from savings after remortgaging a BTL property, most of which went to 'carry forward'
In 2023/24 and 2024/25 I overpaid again from excess earnings whilst using more of the savings to live off (this seperation wouldn't be clear in bank accounts as I move money around a lot to maximise interest rates).
In 2025/26, and onwards, I intend to continue to overpay in the same manner, but also using money from a sale of a property last year; more than £7,500 per year but varying amounts depending on available 'carry forward'.
Most of the previous years overpayments and the upcoming years overpayments exceed 30% of the lump sum amount.

So, there is enough cash in savings and ISA's to buy the car, but I have this identified as being used for future pension contributions.

I 'think' it makes more sense to crystalise part of my pension (around 21% of total pot) and use the 25% cash free element to purchase the car, leaving the remaining 75% untouched so as to not trigger mpaa.
The amount of tax-free cash would exceed £7,500 and buying a car is clearly a planned event.

I understand that this would mean that the remaining crystilised amount would no longer generate any further tax free allowance.

My concern is that HMRC would potentially class this as recycling as I have overpaid and would continue to overpay.
While the future overpayments are not directly coming from tax free amount, the fact that having this amount means that I do not have to use my savings to buy the car and they are therefore available to pay into the pension.
Does this mean then that these future payments can only be made "because of the lump sum", to use HRMC wording. I am finding the "because of" statement to be quite open ended.

So, am I at risk of pension recycling if I do this?
And are there are any other concidersations, now or future, that I should be taking into account.

Thanks in advance. :)

QrizB

Could you expand on why you think it makes sense to take a TFLS from your pension to buy your car, rather than buying it from the cash you already have on hand?

ByondDoubt

https://forums.moneysavingexpert.com/discussion/comment/81865144#Comment_81865144

To use the available cash now would reduce flexibility in the next few years to adapt to any unknown circumstances, albeit that this could be addressed with a future TFLS.
I can vary the value of the overpayments in the future to meet personal and market conditions.
The overpayments would recieve tax relief giving a small boost to the pot value, although it will certainly be taxed on the way back out.

Albermarle

While the future overpayments are not directly coming from tax free amount, the fact that having this amount means that I do not have to use my savings to buy the car and they are therefore available to pay into the pension.Does this mean then that these future payments can only be made "because of the lump sum", to use HRMC wording. I am finding the "because of" statement to be quite open ended

If you take tax free cash and at the same time overpay your pensions, you can not say to HMRC I did not use the tax free cash to overpay the pension, I used some other source of funds. They are not daft and such statements just do not wash, even if they are essentially true.

On the other hand, there seems to be little evidence that HMRC regularly pursue these recycling cases, so as it seems not too blatant you probably have little to worry about. Although you may have technically broken the rules, so you never know.

Grumpy_chap

It seems as though the OP has allowed the tax tail to wag the dog, thus making pension payments to maximise tax efficiency while leaving themselves short of current liquid funds to meet their reasonable needs and wants for their current life. Plus, what liquid funds the OP does have are earmarked for "future pension contributions".

The OP needs to remember that all money is fungible so the simplest thing to do here is use the savings to pay for the car and replenish savings from earnings at the rate that is realistic. Once the savings are replenished they can be used to make additional pension contributions assuming available annual allowance limits (plus any carry forward) are available.

Has the OP taken on board that maximum (gross) contributions in any year are capped by the lower of:

• the individual's earned income
• the annual allowance (£60k) plus any available carry forward

This means that carry forward is not available to be used for anyone where earned income is lower than £60k. (The exception is "employer" contributions are not constrained by earnings, but that does not seem to be relevant here.)

It seems illogical that the OP has been aggressively contributing to pension to maximise tax efficiency but now proposes to crystalise some of that fund early (losing future growth on the amount withdrawn) in order to fund a depreciating asset now while holding some other cash asset for paying into the pension in the future.

All over complicating a simple process - just spend the currently liquid asset on the car and replenish the pension as and when future finances permit.

ByondDoubt

https://forums.moneysavingexpert.com/discussion/comment/81865252#Comment_81865252

Thanks for your response. Few assumptions in there, but I do appreciate it is informative to others who may read this thread.

To be clear, all of the savings are excess above and beyond the 'needs and wants' amount.

I have a monthly spending plan that covers all basics, plus targeted savings like mortgage overpayment, and accruing for annual spend in advance, for example holidays. All income in excess of this budget is pushed to savings; pension contributions to minimum pay, ISA's filled and best interest rate accounts being used.

I have about five years before taking (a slightly early) retirement and will push savings into pensions, taking into account of the maximum contributions limit and filling all yearly allowance and potential carry forward for each.

I am aware of the max lump sum allowance, and when the 40% tax band will kick in, both of which dampen the benefit of pushing to much into the pension if I remain a UK resident, but felt that this was out of scope for the question.

I am replacing a salary sacrifice car and will redirect that pre-tax income to the pension. Not wanting to bore with the details but that will see the position neutral in about one year if the depreciated asset of the car is taken into account, and fully neutral in about four years with the remaining value of the car being 'free' at that time; including compounding interest of the initial amount taken from the pension and the same applied to the new contributions.

The original question is about any risk of falling foul of the recycling rules whilst attempting to maximise efficiency in how to big a large purchase, and if there were any other factors I needed to take into account.

If it wasn't for the slight vagueness in the HMRC text it would be a clearer decision to make.

I do appreciate you taking the time to respond, and I would have added some of the detail above originally if it hadn't felt like it would make it a bit wordy. :)

Grumpy_chap

To the direct question about any risk of falling foul of the recycling rules.

Yes, you may do. It is marginal edge case. Why take the risk when the same outcome (car now and future pension contributions) can be achieved by using the savings to pay for the car and then replenishing the savings? You potentially stand to lose a lot if the recycling rules are triggered and future contributions constrained.