Pension recycling?

[Dashnine]

I’m taking a pre-retirement Tax Free Lump Sum of £30K from my defined contribution pension to contribute to a house deposit (£200K total) and improvements to the new house. I am currently a higher tax rate payer.

I’m planning an interest only mortgage of £100K, but intend to increase my pension contributions from 10% to 28% of basic salary via salary sacrifice. This increase is saving for the repayment of the mortgage capital, the intention being to withdraw the capital from the pension and pay off the mortgage capital when I have retired and pay tax at a lower rate.

Would this be considered pension recycling by HMRC?

Edited by Dashnine on Saturday 25th February 08:46

[Puzzles]

After you’ve taken the drawdown won’t you only get tax relief on a max £4k on further contribution

[Dashnine]

Puzzles said:

After you’ve taken the drawdown won’t you only get tax relief on a max £4k on further contribution

Not, the £4K limit is triggered when you pay tax on a pension withdrawal, I’m taking £30K tax free, £90K will be crystallised for future taxable withdrawal.

Edited by Dashnine on Saturday 25th February 09:09

[steve_n]

https://techzone.abrdn.com/public/pensions/tech-gu...

If you hit all the points it's recycling, if you don't then it's not.

[Dashnine]

steve_n said:

https://techzone.abrdn.com/public/pensions/tech-gu...

If you hit all the points it's recycling, if you don't then it's not.

I’m not quite sure it’s as black and white as that, it seems to be a vague area as I’m not using the tax free cash to reinvest in the pension, I’m using future salary.

From HMRC: The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum.

Edited by Dashnine on Saturday 25th February 09:07

[steve_n]

In short you'll be fine. I've never heard of anyone being caught for it. If challenged you can demonstrate you spent the TFC and funded the pension from other money. Crack on with it.

[Kirkmoly]

steve_n said:

If challenged you can demonstrate you spent the TFC and funded the pension from other money.

From HMRC manual:


Example 3 - Other money available when pension commencement lump sum used to fund increase in contributions
An individual intends to use a pension commencement lump sum of £35,000 that he is able to take from a registered pension scheme to fund a significantly greater contribution of £40,000 to another registered pension scheme in the run-up to the end of the tax year. The individual has more than £40,000 available savings and so could make that contribution using those savings, but to do so would mean using up most of those savings, and so he instead takes the £35,000 pension commencement lump sum and uses that. The fact that the individual had other available money that could have funded the significantly greater contribution does not mean the recycling rule is avoided.

The recycling rule would also apply if, instead of funding the contribution directly from the lump sum, the individual takes the money that pays the contribution out of the available savings and then uses the £35,000 pension commencement lump sum to replenish those savings. A short-term loan in anticipation of the lump sum to repay it would be treated similarly.

Despite paying the increased contributions from existing savings, the recycling rule is triggered because the individual always intended the pension commencement lump sum to be an integral aspect of providing the means, albeit in an indirect way, to pay those increased contributions.

[steve_n]

Irrelevant.

He's increasing salary sacrifice so clearly coming from future earnings not other money available now. Also not adding £30k in one go.

[dingg]

To avoid falling foul of the ruling, increase your pension payments sometime before taking the lump sum

[steve_n]

Psst...nobody reports on this stuff.