Sipp contribution close to retirement

[terminal7]

My wife has a SIPP and will be retiring next year. Is there any 'recycling' problem of contributing in one year - receiving the HMRC contribution - taking the 25% tax free withdrawal next year - and taking out the rest (or placing rest into drawdown). It seems to me (maybe my maths are wonky) that there is a gain from the above assuming you are a tax payer.
Let's say as a basic rate tax payer she puts in £8k this FY and consequently receives £2k into the SIPP from HMRC. She take out in the next FY 25% tax free - £2.5k. She would pay £1.5k tax on balance £7.5k. Hence an initial £8k contribution becomes £8.5k. Of course the benefit would be even greater if she was a higher rate tax payer during her work period and a lower tax rate payer after retirement.

T7

[Alaric]

Is there any 'recycling' problem of contributing in one year - receiving the HMRC contribution - taking the 25% tax free withdrawal next year - and taking out the rest (or placing rest into drawdown).

I don't believe that's a problem as it's intrinsic to the way the pensions have always worked.

Recycling is where you take 25% cash and then use the proceeds to make another contribution. Even there it might still be OK when there's another source of finance for the new contribution.

[pochisoldi]

There may be administrative (rather than tax) reasons why this won't work - many SIPPs will hammer you for charges if you close/transfer/realise funds within 12-36 months of starting the SIPP. This could wipe out any tax advantages.

If the tax rules permit the chosen path, then make sure you check and double check the SIPP charging tariff before proceeding.

[ursaminortaur]

Is there any 'recycling' problem of contributing in one year - receiving the HMRC contribution - taking the 25% tax free withdrawal next year - and taking out the rest (or placing rest into drawdown).

I don't believe that's a problem as it's intrinsic to the way the pensions have always worked.

Recycling is where you take 25% cash and then use the proceeds to make another contribution. Even there it might still be OK when there's another source of finance for the new contribution.

One gotacha might be if the contribution to the pension was borrowed and then the loan was paid off with the tax free lump sum however problems with recycling only really kick in when the tax free lump sum is larger than £7,500 and contributions have increased by more than 30% over previous contributions.

See

https://www.sharesmagazine.co.uk/article/can-i-recycle-my-pensions-to-get-extra-tax-free-cash


HMRC will only consider recycling of tax-free cash to potentially breach its rules where the tax-free sum (or sums) received over a 12 month period are worth more than £7,500.

Even then, the rules will only kick in where the payment has resulted in a 30% or more increase in contributions to your pension compared to what might normally have been expected.
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Equally, HMRC will penalise you for recycling if you borrow money to pay contributions or pay into your pension out of savings and then use the tax-free lump sum to pay off the loan or top up savings.