Pension recycling rules

[teecee90]

Can anyone advise on the following situation?

I intend to draw my DB pension benefits next year with maximum lump sum. I intend to keep working for another 5 years or so but the income from the pension will allow me to go part time (say 4 days a week). The pension will, however, take me into the higher rate tax bracket by about £7k per year. I am currently employed in local government and paying into the LG pension scheme with a small amount of Additional Voluntary Contributions (£100 pm). I am thinking that I could increase the AVCs to £600 per month to bring my taxable pay back under the higher rate threshold. Would this fall foul of the recycling rules even though I would not be using my lump sum to increase my AVCs?

Thanks

[pochisoldi]

I suggest having a look at
https://www.pensionsadvisoryservice.org ... -allowance (scan down to the MPAA bit)
or
https://adviser.royallondon.com/technic ... -the-mpaa/

PochiSoldi

[teecee90]

Those links are as clear as mud to me. Can anyone explain it in layman’s terms.

[argoal]

You will not be caught by the pension recycling rules if your additional contributions over a three year period amount to less than 30% of the tax free lump sum.

If the lump sum was £100 K then you could increase contributions by £10K per year safely within the rules.

Over the next 3 years you will contribute £500 x 12 x 3 = £18K extra to your pension.

So if your Lump sum was more than £60K you will not fall foul of the recycling rules.

If your lump sum was less than £60k then other tests come into play.

The other factor is that I would expect your main pension contributions will reduce if you go 4 days per week assuming the same proportion of salary will be contributed to your pension in future. This should give you a bit of wriggle room regarding contributions as the additional £500/month avcs will replace a portion of your current pension contributions rather than add to them.

The link to the annual allowance is relevant because if you start to draw a pension above the tax free lump sum then the value that you can contribute to your pension that is tax free drops from £40k per year to £4K per year.

This is clearly relevant in your situation.

It would be worth considering postponing taking your pension and if going to 4 days per week then replacing the salary from the lump sum as this would still allow you to make full pension contributions.

A call to the Pension advice service would probably be a good idea before you do anything. Alternatively a financial advisor could clarify your options for you.

[ursaminortaur]

You will not be caught by the pension recycling rules if your additional contributions over a three year period amount to less than 30% of the tax free lump sum.

If the lump sum was £100 K then you could increase contributions by £10K per year safely within the rules.

Over the next 3 years you will contribute £500 x 12 x 3 = £18K extra to your pension.

So if your Lump sum was more than £60K you will not fall foul of the recycling rules.

If your lump sum was less than £60k then other tests come into play.

The other factor is that I would expect your main pension contributions will reduce if you go 4 days per week assuming the same proportion of salary will be contributed to your pension in future. This should give you a bit of wriggle room regarding contributions as the additional £500/month avcs will replace a portion of your current pension contributions rather than add to them.

The link to the annual allowance is relevant because if you start to draw a pension above the tax free lump sum then the value that you can contribute to your pension that is tax free drops from £40k per year to £4K per year.

This is clearly relevant in your situation.

It would be worth considering postponing taking your pension and if going to 4 days per week then replacing the salary from the lump sum as this would still allow you to make full pension contributions.

A call to the Pension advice service would probably be a good idea before you do anything. Alternatively a financial advisor could clarify your options for you.

There is a fairly good flowchart on pension recycling here

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/