Pension recycling but within the rules?
Discussion
I have a mixture of defined benefits and defined contributions pensions and I am now turning 55. With my DC pensions, I have two pots. The larger pot is one that I am still currently contributing to through my current employer and a smaller pot that is just sitting around waiting for me to retire. The smaller fund is in the region of £90k. I can therefore withdraw £22.5 tax free. I am a 40% tax payer
I believe the pension recycling rules mean that I can withdraw up to £7500 per 12 months without incurring any tax implications. So my plan is to withdraw £7200 per year for the next three years from my smaller pot.
I will then increase my contributions into the larger pot by £12,000 per year. This loss of £12k in my take home pay will then be covered by the £7200 that I have withdrawn tax free.
I think this is legal but I just want to check as I am under the £7.5k pension recycling rules per year.
I believe the pension recycling rules mean that I can withdraw up to £7500 per 12 months without incurring any tax implications. So my plan is to withdraw £7200 per year for the next three years from my smaller pot.
I will then increase my contributions into the larger pot by £12,000 per year. This loss of £12k in my take home pay will then be covered by the £7200 that I have withdrawn tax free.
I think this is legal but I just want to check as I am under the £7.5k pension recycling rules per year.
Edited by A900ss on Sunday 8th February 09:31
A900ss said:
IJWS15 said:
AIUI when you start taking money from a DC pot then you trigger a limit to the amount that can be put in - I ve just triggered it. Totally separate rule to recycling.
Thanks. Do you know what the limit is?https://luminwealth.co.uk/dont-inadvertently-limit...
Edited by A900ss on Friday 6th February 09:25
The HMRC manual linked below has a set of criteria that defines what they deem to be recycling.
From my reading, your plan meets all those criteria except one - the lump sum doesn't exceed £7,500. So your plan seems safe provided the £7,200 is funded from lump sums, not taxable income.
Contrary to what was said earlier in this thread, both employee and employer contributions are considered.
https://www.gov.uk/hmrc-internal-manuals/pensions-...
From my reading, your plan meets all those criteria except one - the lump sum doesn't exceed £7,500. So your plan seems safe provided the £7,200 is funded from lump sums, not taxable income.
Contrary to what was said earlier in this thread, both employee and employer contributions are considered.
https://www.gov.uk/hmrc-internal-manuals/pensions-...
A900ss said:
Just had a quick look and I think this £10k limit only kicks if you take taxable money from your pension. My withdrawals will be within the tax free 25% limit so I think I m ok.
https://luminwealth.co.uk/dont-inadvertently-limit...
I took more than the 25% - taking advantage of headspace before the 40% tax rate kicks in to move money into ISAs. Being 66 and retired the contribution limit isn’t a concern for me😊.https://luminwealth.co.uk/dont-inadvertently-limit...
Edited by A900ss on Friday 6th February 09:25
IJWS15 said:
AIUI when you start taking money from a DC pot then you trigger a limit to the amount that can be put in - I ve just triggered it. Totally separate rule to recycling.
What if you have 3 or 4 pots from previous employment? And one yiu are paying into via current employment? IJWS15 said:
AIUI when you start taking money from a DC pot then you trigger a limit to the amount that can be put in - I ve just triggered it. Totally separate rule to recycling.
Taking the tax-free lump sum (PCLS) does not trigger the annual contribution limit (MPAA). It's only when you take taxable income, as already said. E.g. if you have a SIPP and move £30K to drawdown, you will receive £7.5K of that as PCLS. If you leave the rest in drawdown, then MPAA won't be triggered. If you take any of the taxable part, it will be.ChocolateFrog said:
It's not recycling because the extra pension contributions are still coming out of your income from your job, which you can sacrifice upto 100% upto the limits.
That is not relevant. If you take more than £7.5K total tax-free lump sums in any 12-month period, then you are subject to the recycling tests. This includes things like whether you contributions have significantly increased, over a five-year period (the current tax year, the two years before, and the two years after - this is to stop people getting round it by delaying recycling to subsequent years.)thinkofaname said:
That is not relevant. If you take more than £7.5K total tax-free lump sums in any 12-month period, then you are subject to the recycling tests. This includes things like whether you contributions have significantly increased, over a five-year period (the current tax year, the two years before, and the two years after - this is to stop people getting round it by delaying recycling to subsequent years.)
Thanks. So my proposal as per first post seems like it wouldn t be disadvantageous for any other taxes?
I’m fully aware that my total 25% tax free I can draw when I do retire will be lower when both pots are added but it’s circa £15k of extra pension contributions just by moving funds effectively.
Edited by A900ss on Friday 6th February 12:15
Well obviously I'm not offering financial advice, but I have been doing something similar for several years - moving just less than £30K of my SIPP into drawdown, taking the £7,495 lump sum and leaving the rest invested in the drawdown account, and in the meantime my SIPP contributions have risen sharply as I approach retirement. No angry letters from HMRC as yet...
[edit] the "two years into the past" test is something to bear in mind, though. It means that if you wanted to retire today, you'd have to limit your withdrawals from the pension for this and the next two tax years.
[edit] the "two years into the past" test is something to bear in mind, though. It means that if you wanted to retire today, you'd have to limit your withdrawals from the pension for this and the next two tax years.
Edited by thinkofaname on Friday 6th February 12:27
Thanks.
The real benefit will start next year when my wife retires and gets a large tax free lump sum as a public worker.
Then I will increase my total contributions to £60k (inc employer contributions) as long I earn minimum wage.
We can then live off her lump sum whilst my pot builds for a few years.
I ve paid enough tax in my lifetime, I don t mind playing with the rules HMRC have set to maximise my position.
Thanks all.
The real benefit will start next year when my wife retires and gets a large tax free lump sum as a public worker.
Then I will increase my total contributions to £60k (inc employer contributions) as long I earn minimum wage.
We can then live off her lump sum whilst my pot builds for a few years.
I ve paid enough tax in my lifetime, I don t mind playing with the rules HMRC have set to maximise my position.
Thanks all.
Royal London has a helpful flowchart you could look at to check whether you would fall foul of recycling rules. It’s apparently aimed at advisers but that might just be a way to avoid there being any suggestions of it being advice if you use that info.
There are several ifs and buts, but as long as you have taken out a lump sum of less than £7.5k as you suggest, you should be fine. (Other recycling exemptions also apply.)
There are several ifs and buts, but as long as you have taken out a lump sum of less than £7.5k as you suggest, you should be fine. (Other recycling exemptions also apply.)
Zigster said:
Royal London has a helpful flowchart you could look at to check whether you would fall foul of recycling rules. It s apparently aimed at advisers but that might just be a way to avoid there being any suggestions of it being advice if you use that info.
There are several ifs and buts, but as long as you have taken out a lump sum of less than £7.5k as you suggest, you should be fine. (Other recycling exemptions also apply.)
Have you got a link ? There are several ifs and buts, but as long as you have taken out a lump sum of less than £7.5k as you suggest, you should be fine. (Other recycling exemptions also apply.)
xeny said:
Nice flow chart. Thanks. Gassing Station | Finance | Top of Page | What's New | My Stuff