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  • FIRST POST
    • Lancelot6
    • By Lancelot6 2nd Apr 17, 5:48 PM
    • 7Posts
    • 1Thanks
    Lancelot6
    Recycling Pension ?
    • #1
    • 2nd Apr 17, 5:48 PM
    Recycling Pension ? 2nd Apr 17 at 5:48 PM
    Hello,

    I would appreciate any help or suggestions anyone can offer me.

    I like a lot of other people am very confused by the re-cycling rules on pensions. Everything I read appears to refer to Defined Contribution (DC) pensions, and there does not seem to be anything referring to Defined Benefit (DB) pensions.

    I am 55 and have a private employer based DB pension which I would like to take as soon as I can clarify the rules. At 55 the pension gives a tax free lump sum of 120,000 and a reduced pension of 18,000 p.a.

    If I take the pension, and continue working as I intend to do with my current salary of approx. 40,000 I will clearly end up paying higher tax rate, since my combined earnings will be 40,000 + 18,000 = 58,000 p.a

    If I leave the lump sum in a bank, or invest it elsewhere, not in a pension, can I join a SIPP and pay 30,000 p.a. into the SIPP from my salary (includes employer contributions, and current AVC contributions) to avoid the 40% tax which I would otherwise pay?
    My understanding is:-

    1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?

    2. I can also do this because I am not exceeding 100% of my employment earnings of 40,000.

    3. There will be no reduction in my yearly allowance of 40,000 because I am taking the pension from a DB pension scheme, and not a DC scheme.

    4. After about 1 5 years, when I have had enough of work, I will be able to take another 25% lump sum from the SIPP, and draw down the remainder whenever I need it.

    I am nowhere near the lifetime allowance of 1,000,000 I really just want to know if I can do it legally, and if I am missing anything obvious.

    I have done the maths, and providing the government do not change any rules (yes, I know they may well do, and have been thinking about it) then the maths far and away says that leaving the DB and joining the SIPP is the best thing to do.

    Thanks for your help,

    Lancelot6
Page 1
  • jamesd
    • #2
    • 2nd Apr 17, 8:28 PM
    • #2
    • 2nd Apr 17, 8:28 PM
    Your plan seems fine. I summarise the recycling rules here. Using income for contributions while not living on the lump sum is fine and that's what you seem to be doing, along with just normal retirement planning.

    If your work pension isn't salary sacrifice tell HMRC about your intended level of pension contributions for the year and they will adjust your tax code to try to give you the correct amount of 40% relief throughout the year.

    You can take 7,500 per rolling twelve month period within the recycling rules and it might be best to try to do this as well to try too keep down the potential for exceeding the lifetime allowance. Since you can prove no recycling you could take the whole 25% instead.

    I suggest making pension contributions of your whole pay since you can afford it and it'll provide you with a tax gain, effectively making 40k of your income a quarter tax free on top of your personal allowance. For the remainder of your tax bill you might consider a little VCT buying. Plenty of capital for this so provided the investments are suitable there's no need to pay income tax at all.
    Last edited by jamesd; 02-04-2017 at 8:45 PM.
    • TcpnT
    • By TcpnT 3rd Apr 17, 10:04 AM
    • 125 Posts
    • 70 Thanks
    TcpnT
    • #3
    • 3rd Apr 17, 10:04 AM
    • #3
    • 3rd Apr 17, 10:04 AM
    Jamesd, Are you sure about this ? My reading of the OP's suggestion - see paragraph below:

    1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?
    Is that he is not suggesting a DB transfer but is planning to start drawing the DB pension at 55 and taking the associated lump sum.

    Surely in this case with an income being taken from the DB pension the Money Purchase Annual Allowance will be applicable and he will be restricted to 10,000 (Possibly soon 4000) gross annual contributions to a SIPP or other pension - so that suggested plan will not be possible.

    Maybe be my understanding is incorrect but I'm pretty sure on this one.
    • xylophone
    • By xylophone 3rd Apr 17, 10:10 AM
    • 25,599 Posts
    • 15,130 Thanks
    xylophone
    • #4
    • 3rd Apr 17, 10:10 AM
    • #4
    • 3rd Apr 17, 10:10 AM
    Surely in this case with an income being taken from the DB pension the Money Purchase Annual Allowance will be applicable and he will be restricted to 10,000
    No.

    http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/


    Accessing benefits non flexibly

    As long as the flexible access detailed above is avoided then a member will not trigger the MPAA. Examples of this are taking a scheme pension from a defined benefits arrangement or taking a non-flexible annuity.
    • Lancelot6
    • By Lancelot6 3rd Apr 17, 1:22 PM
    • 7 Posts
    • 1 Thanks
    Lancelot6
    • #5
    • 3rd Apr 17, 1:22 PM
    • #5
    • 3rd Apr 17, 1:22 PM
    Thank you all for your replies.

    It sounds as if I will be able to carry this out. Though the second post does demonstrate the confusion between the rules when applied to DB or DC (and the flexible aspect of DC Pensions).

    Jamesd, the scheme is indeed a salary sacrifice system, but I still expected to be taxed and have to claim it back at the end of the year. Indeed this was one aspect of the idea that I am still trying to deal with since I was thinking that I would have to "borrow" from other investments, to "repay" myself the temporarily loss of 40% tax from the 18,000 pension. In other words, I assumed I would have to find the 40% tax for the first year since I would only get it back in time for the second year, if that makes sense.

    You are saying that this will not be the case because it is a salary sacrifice scheme, and that it should be adjusted "in real time"? Or that if I let the HMRC know before I start to do this, that I will not lose the tax in "real time" either? That is really helpful since I have some long standing investments including PEPS (whatever happened to them, do they still count tax free? I hope so.) and ISAS and unit trusts, which are also a part of my retirement plans, and which I would rather not have to break into just now if I do not need to.

    My other main problem is where to put the lump sum in order to get an ok'ish return. I am not looking forward to that problem. My wife doesn't want me to take risks, but I know that that is the way to grow it. The obvious thing to do is to squirrel it away in lots of little investments to reduce risk, but that doesn't really help to demonstrate that I am not using it to fund pension contributions.

    Lancelot6
    • xylophone
    • By xylophone 3rd Apr 17, 1:46 PM
    • 25,599 Posts
    • 15,130 Thanks
    xylophone
    • #6
    • 3rd Apr 17, 1:46 PM
    • #6
    • 3rd Apr 17, 1:46 PM
    My other main problem is where to put the lump sum
    Are you compelled to take the lump sum?
    • TcpnT
    • By TcpnT 3rd Apr 17, 2:25 PM
    • 125 Posts
    • 70 Thanks
    TcpnT
    • #7
    • 3rd Apr 17, 2:25 PM
    • #7
    • 3rd Apr 17, 2:25 PM
    Jamesd, Are you sure about this ? My reading of the OP's suggestion - see paragraph below:

    !!!8220;
    1. That I am not recycling since I am not using tax free cash from my lump sum, I will be reducing my employment earnings by paying them into the SIPP. And will be living off the remainder of my earnings plus my pension. I assume the pension will be taxed at 40% initially which I will then have to claim back?
    !!!8221;Is that he is not suggesting a DB transfer but is planning to start drawing the DB pension at 55 and taking the associated lump sum.

    Surely in this case with an income being taken from the DB pension the Money Purchase Annual Allowance will be applicable and he will be restricted to 10,000 (Possibly soon 4000) gross annual contributions to a SIPP or other pension - so that suggested plan will not be possible.

    Maybe be my understanding is incorrect but I'm pretty sure on this one.
    My apologies for confusing the matter. I was wrong and other replies here are correct
    • Lancelot6
    • By Lancelot6 3rd Apr 17, 3:11 PM
    • 7 Posts
    • 1 Thanks
    Lancelot6
    • #8
    • 3rd Apr 17, 3:11 PM
    • #8
    • 3rd Apr 17, 3:11 PM
    Are you compelled to take the lump sum
    No, I can buy an annuity or transfer it out.
    • xylophone
    • By xylophone 3rd Apr 17, 3:29 PM
    • 25,599 Posts
    • 15,130 Thanks
    xylophone
    • #9
    • 3rd Apr 17, 3:29 PM
    • #9
    • 3rd Apr 17, 3:29 PM
    You can't simply take a higher scheme pension?
    • Lancelot6
    • By Lancelot6 3rd Apr 17, 5:01 PM
    • 7 Posts
    • 1 Thanks
    Lancelot6
    You can't simply take a higher scheme pension?
    Yes, I can take any percentage of lump sum from 0 - 25% The pension would go from around 18,500 to 19,700 which is my maximum taking it at at 55 years. So I would be buying an extra 1,200 p.a. pension. I have no idea how I could calculate how much to reduce my lump sum percentage by in order to do this. However, it looks like it would cost me around 20,000 from my lump sum to do it, since adding 25,000 by AVC (if I was able to do that in one go) would increase my lump sum from 124,000 to 130,000 and my pension to 19,500.

    Is it worth paying 20,000 to receive an extra 1000 pension. I guess that is the question. It would take 20 years to get it back even without taking any investment increase of the 20,000. Also the extra pension is subject to tax when I do stop paying into any SIPP I open.
    Last edited by Lancelot6; 03-04-2017 at 5:27 PM.
  • jamesd
    Jamesd, Are you sure about this ? ... Maybe be my understanding is incorrect but I'm pretty sure on this one.
    Originally posted by TcpnT
    Please don't let this discourage you from speaking up in the future when you think I've made a mistake. I do sometimes and being told about them beats the alternative!
  • jamesd
    The way it works with salary sacrifice is:

    1. Employer can let you sacrifice down to minimum wage and you should probably do this. Law bars them from going below minimum wage. This gets you part of the relief during the tax year automatically.
    2. You tell HMRC about your expected post-sacrifice pay for the year and also about any non-sacrifice pension contributions you make.
    3. HMRC issues tax codes to give you any extra relief you're entitled to. If post-sacrifice gross pay plus taxable pension gross plus other taxable income is up to the basic rate limit there won't be any extra relief, else they will tell work or pension to deduct less tax via a coding notice to give you however much extra higher rate relief you're entitled to.

    One tool to consider is the small pots rule. This lets you take all of the money out of a pension pot worth up to 10,000 and doesn't trigger the MPAA. So you could say open a SIPP with Hargreaves Lansdown now and pay in gross 13,300 then after waiting a year (or paying their closure within one year charge) you can:

    A. Take a 25% tax free lump sum of 3,325 and place the remaining 9,975 into drawdown, leaving nothing in the uncrystallised pot.
    B. Take the 9,975 as a small pot lump sum. It'll all be taxed because you already took the tax free lump sum.

    You can potentially do all of this early in the tax year so that the net 10,640 you pay in doesn't have to be tied up for long.

    Except for occupational schemes you're restricted to using the small pots rule no more than three times during your life.

    The 13,300 gross is conveniently close to the income that your employer isn't allowed to let you sacrifice due to the minimum wage law. So it could be a neat way to pay in 100% of pay without tying up 100% of pay inside a pension.

    You can potentially avoid early closure charges by planning more than a year ahead, like opening an account somewhere else now that you wouldn't use until more than a year from now.
    Last edited by jamesd; 03-04-2017 at 11:37 PM.
  • jamesd
    High lump sum may make sense because subject to the recycling limits you can recycle much of it or just invest it in things like P2P that you can't readily do within a pension at the moment.

    If you were able to take the DB this tax year the recycling restrictions on the lump sum would end on 6 April 2019. One year later if you don't do it before 6 April 2017. This is the five year rule: tax year it's taken and the two following ones being the relevant restriction period.
    • pensionpawn
    • By pensionpawn 7th Jan 18, 9:21 AM
    • 36 Posts
    • 3 Thanks
    pensionpawn
    Rules on recycling...
    Fairly knowledgeable (well more than most around me) of pension rules however I'm not sure if I follow all of the above. Therefore I am correct in saying that if you trigger the 4k rule by accessing one of your pension pots then this applies to all of your pots?

    Also, does anyone know if once the trigger has occurred, if you are a higher rate tax payer you can claim relief on the 4k contributions at higher rate (via salary sacrifice or tax return?)
    • xylophone
    • By xylophone 7th Jan 18, 1:25 PM
    • 25,599 Posts
    • 15,130 Thanks
    xylophone
    Read http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/#



    https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/defined-benefits-and-the-mpaa/

    The MPAA applies to all Defined Contribution (DC) savings made by that individual after the date it's triggered.

    It is the annual allowance that has reduced, not the tax relief available on that reduced allowance.
    • pensionpawn
    • By pensionpawn 7th Jan 18, 10:17 PM
    • 36 Posts
    • 3 Thanks
    pensionpawn
    So if the total of drawdown plus employed income nudges you into the 40% tax bracket 4000 of pension contribution would only cost you 2400 with the government stumping up the additional 1600. Thus stepping into the 40% bracket by 1 could save you 800?
  • jamesd
    You only get higher rate relief for the portion taxed at higher rate. So a Pound into higher rate gets you 20p basic and 20p higher.
    • pensionpawn
    • By pensionpawn 8th Jan 18, 8:17 AM
    • 36 Posts
    • 3 Thanks
    pensionpawn
    I wasn't aware of that so thanks for clearing that up. No real incentive then to push the 'income' up in 'retirement' then!
    • haf63
    • By haf63 8th Jan 18, 11:38 AM
    • 204 Posts
    • 52 Thanks
    haf63
    A follow on question if i may...

    If you are at LTA and then take your pension (my situation soon) then is there any point/advantage to continue investing in a pension - either from earned income or at the 4000 limit level?
    • pensionpawn
    • By pensionpawn 8th Jan 18, 10:19 PM
    • 36 Posts
    • 3 Thanks
    pensionpawn
    A follow on question if i may...

    If you are at LTA and then take your pension (my situation soon) then is there any point/advantage to continue investing in a pension - either from earned income or at the 4000 limit level?
    Originally posted by haf63
    I'm new to the term LTA and am not sure how to answer your question other than saying that the reason for looking to invest 4k every year is just to top up the fund a little, making use of the tax relief. In my line of work after retiring I could take on a months worth of work a year (October or November or end of February / March up to the end of the tax year). If the work doesn't happen one year then it's no big deal.

    Out of interest, has the government stated that the new 4k limit will be indexed each year?
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