A useful reminder of the “pension recycling” rules
We have recently seen a significant increase in people getting in touch with us about paying contributions or drawing benefits from SIPPs because of the ongoing speculation around the Budget.
On 30 October, Rachel Reeves will deliver the first Labour Budget in over 14 years. Press speculation over the last few months suggests that a tax raid on pensions is in her sights to help plug the reported £22 billion deficit in the country’s finances.
This BBC article is typical of the rumours that are playing out in both mainstream and industry media.
Throw in the recent removal of the Lifetime Allowance and the introduction of the Lump Sum Allowance (LSA) and the Lump Sum Death Benefit Allowance (LSDBA), these last 12 months have felt like a period of instability we have not seen for a long time.
We do not know any more about what is likely to be announced than what we read in the press. Advisers are telling us clients want to make decisions on their pension that they cannot advise on. The amount of benefit payment requests we have received has risen and clients are contacting us directly to ask what they should do.
While we cannot help with the crystal ball gazing, one piece of current HMRC guidance that we have had to regularly remind advisers and clients about over the past couple of weeks is “recycling”.
A reminder of the recycling rules
Recycling feels like one of those rules that most people know about but can easily be forgotten in the confusion leading up to the Budget.
In simple terms, they are in place to stop individuals taking advantage of the tax relief available on pensions, both on the way in and on the way out.
HMRC describe it as:
“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.”
Like a lot of HMRC guidance, the rules on recycling are slightly subjective. However, the pensions tax manual does provide some clear details on when the recycling rules would apply:
“The recycling rule applies in respect of all pension commencement lump sums paid on or after 6 April 2006, where those lump sums are used as part of a recycling device, regardless of when the significantly increased contributions are actually paid.”
The recycling rule applies when all of the following conditions are met:
- The individual receives a pension commencement lump sum.
- Because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be.
- The additional contributions are made by the individual or by someone else, such as an employer.
- The recycling was pre-planned.
In addition, for the recycling rule to apply, the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12-month period, must exceed:
- £7,500 for events on or after 6 April 2015, or
- 1% of the standard Lifetime Allowance for events before 6 April 2015.
In addition:
- The cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.
The pensions tax manual contains more information about recycling.
We would urge advisers and clients to consider the recycling rules before making any decisions around pension contributions or benefits withdrawal before the Budget.
Get in touch
If you have any SIPP-related queries, or if you have any clients who could benefit from SIPP or SSAS advice, please get in touch.
Email info@ipm-pensions.co.uk or call 01438 747151.