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Pension recycling

steelman99
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Pension recycling

#213643

Postby steelman99 » April 8th, 2019, 3:06 pm

All the wife is retiring in August , and will be getting a lump sum of around 6k from her local government pension scheme
she also has a private pension which I've been paying £120 per month for the last 30 years. In the last tax year , she paid in a lump sum of £2k , basically because it was from a regular saving account which had matured and she didn't need it for anything

she is planning to draw around £700 per month from the private pension starting in August to top up her council pension of around £400 per month ( should just keep her below the income tax bracket ) she was looking to put about half her lump sum into her pension so that here was enough in there to keep drawing £700 per month till she was 67 and gets her state pension

we have read bits about recycling pension lump sums and don't want to fall foul of this - not sure if to sit in the £3k and not draw anything out the pension for 4 months, but will they look at the £2k she paid in during the last tax year as recycling ?

Taverhamboy
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Re: Pension recycling

#213696

Postby Taverhamboy » April 8th, 2019, 7:12 pm

My wife pays in £2880 into her SIPP each year and receives the £720 tax relief. This is not considered to be Pension recycling and anybody can do this. As my wife is now over 55 she keeps the money in cash and subsequently withdraws it later in the year, getting a 25% return on the money. She will be doing this until she reaches 67 when her Council Pension and state pension will use up all her Tax Allowance.

Taverhamboy

JuanDB
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Re: Pension recycling

#213767

Postby JuanDB » April 9th, 2019, 12:04 am

My understanding is that any reinvestment of PCLS below around £7500 is not considered recycling. See below link.

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

The £2k contributed from savings would certainly not be recycling if it did not originate from pension income.

BusyBumbleBee
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Re: Pension recycling

#213861

Postby BusyBumbleBee » April 9th, 2019, 12:12 pm

Taverhamboy wrote:My wife pays in £2880 into her SIPP each year and receives the £720 tax relief. This is not considered to be Pension recycling and anybody can do this. As my wife is now over 55 she keeps the money in cash and subsequently withdraws it later in the year, getting a 25% return on the money. She will be doing this until she reaches 67 when her Council Pension and state pension will use up all her Tax Allowance. Taverhamboy

If you merely contribute the stakeholder amount of £3,600 (£2880 net) the basic rate tax band is notionally extended by £3600 see the SA110 notes boxes A117, A118 and A119 so your wife should be able to continue doing this until the reaches 75. Mine does and we don't live far from Taverham ;) The £720 free from HMG is a welcome addition.

AJC5001
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Re: Pension recycling

#214013

Postby AJC5001 » April 9th, 2019, 11:11 pm

BusyBumbleBee wrote:
Taverhamboy wrote:My wife pays in £2880 into her SIPP each year and receives the £720 tax relief. This is not considered to be Pension recycling and anybody can do this. As my wife is now over 55 she keeps the money in cash and subsequently withdraws it later in the year, getting a 25% return on the money. She will be doing this until she reaches 67 when her Council Pension and state pension will use up all her Tax Allowance. Taverhamboy

If you merely contribute the stakeholder amount of £3,600 (£2880 net) the basic rate tax band is notionally extended by £3600 see the SA110 notes boxes A117, A118 and A119 so your wife should be able to continue doing this until the reaches 75. Mine does and we don't live far from Taverham ;) The £720 free from HMG is a welcome addition.


I'm doing this as well, as the £2880 contribution is potentially going to the descendants free of IHT instead of having to pay 40% IHT if assets exceed the allowances (as they currently would, given house prices!). The fact that I get a further £720 to pass on IHT free amuses me :) So the inheritance becomes £2880 + £720 = £3600 instead of £2880 - 40% = £1728. (adjusted by investment performance as time passes.)

It's also an insurance against future care costs, as it can be drawn from to fund such care if the rest of my assets should be inadequate.

Adrian

uspaul666
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Re: Pension recycling

#214062

Postby uspaul666 » April 10th, 2019, 9:06 am

Sorry to butt in but is it always the case that if the contribution is before the withdrawal that it is no recycling? I plan to take some or all of my 25% PCLS this year, but leave the rest untouched, but I’d like to make a contribution of £2880 net now. The 25% PCLS would be more than £7500.

ursaminortaur
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Re: Pension recycling

#214084

Postby ursaminortaur » April 10th, 2019, 10:08 am

uspaul666 wrote:Sorry to butt in but is it always the case that if the contribution is before the withdrawal that it is no recycling? I plan to take some or all of my 25% PCLS this year, but leave the rest untouched, but I’d like to make a contribution of £2880 net now. The 25% PCLS would be more than £7500.



If you took out a loan and then made increased contributions before receiving the tax free lump sum and then used that to pay off the loan then potentially you could be in trouble.

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

If the member borrows money to pay the contributions or pays the contributions out of savings then uses the tax-free lump sum to pay off the loan or top up the savings, recycling will still be deemed to have occurred. This of course, assumes that all other conditions have been met.

Contributions would though need to be at least 30% higher than normal.
Note. It also says that making increased contributions out of savings and then topping-up the savings with the tax free lump sum would contravene the recycling rules however I'd think it would be much more difficult for HMRC to prove that was pre-planned than if you had taken out a loan.
Note 2. I'm not a pension advisor and I have no knowledge as to whether HMRC has ever enforced this part of the rules.

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Re: Pension recycling

#214091

Postby vrdiver » April 10th, 2019, 10:25 am

Mrs VRD is a non tax-payer, and has started to drawdown from her SIPP.

As I currently understand things, she could contribute £2880 net (£3600 gross) each year, regardless of where the funds came from?

Or, she could contribute £240 net each month and increase her withdrawal by £300 each month, all without falling foul of any recycling rules?

Would be good to know if I have understood the rules correctly!

VRD

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Re: Pension recycling

#214099

Postby BusyBumbleBee » April 10th, 2019, 10:58 am

AJC5001 wrote:I'm doing this as well, as the £2880 contribution is potentially going to the descendants free of IHT instead of having to pay 40% IHT if assets exceed the allowances (as they currently would, given house prices!). The fact that I get a further £720 to pass on IHT free amuses me :) So the inheritance becomes £2880 + £720 = £3600 instead of £2880 - 40% = £1728. (adjusted by investment performance as time passes.)

It's also an insurance against future care costs, as it can be drawn from to fund such care if the rest of my assets should be inadequate.Adrian


Very well said, Adrian. If you do this for both yourself and your wife (as we have been doing) it's a double whammy. I simply don't know why more people don't do it as it must be the most profitable of all the tax saving tips.

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Re: Pension recycling

#214106

Postby Chrysalis » April 10th, 2019, 11:26 am

but of course the £2880 trick only works if you are below the LTA.

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Re: Pension recycling

#214114

Postby Bialystock » April 10th, 2019, 11:54 am

Jabd2001 wrote:but of course the £2880 trick only works if you are below the LTA.


Or, more correctly, havent crystallised 100% of LTA and can still take up to 3 lots of £10,000 or less as small pots which do not use up any LTA allowance. I have more than LTA so plan on having 3 small pots as well to get an extra £30k before LTA charges apply.

Should have applied for FP 2016 but missed the boat as wasnt expecting the jump in values after the referendum and so carried on contributing, and still am.

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Re: Pension recycling

#214115

Postby BusyBumbleBee » April 10th, 2019, 12:01 pm

"The £2280 trick" ;) (as it now seems to be called) : should have added that - if you didn't make a contribution last year you can make that contribution in this tax year in addition to this years contribution.

JuanDB
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Re: Pension recycling

#214162

Postby JuanDB » April 10th, 2019, 4:01 pm

BusyBumbleBee wrote:"The £2280 trick" ;) (as it now seems to be called) : should have added that - if you didn't make a contribution last year you can make that contribution in this tax year in addition to this years contribution.



I’m not aware you can carry forward the basic allowance, only unused allowance from earned income?

swill453
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Re: Pension recycling

#214167

Postby swill453 » April 10th, 2019, 4:12 pm

uspaul666 wrote:Sorry to butt in but is it always the case that if the contribution is before the withdrawal that it is no recycling? I plan to take some or all of my 25% PCLS this year, but leave the rest untouched, but I’d like to make a contribution of £2880 net now. The 25% PCLS would be more than £7500.

I remember reading, on good authority I think, that paying the minimal £2880/£3600 into a pension will never be deemed to be recycling.

I can't remember where it was though.

Scott.

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Re: Pension recycling

#214179

Postby PinkDalek » April 10th, 2019, 4:47 pm

JuanDB wrote:
BusyBumbleBee wrote:"The £2280 trick" ;) (as it now seems to be called) : should have added that - if you didn't make a contribution last year you can make that contribution in this tax year in addition to this years contribution.



I’m not aware you can carry forward the basic allowance, only unused allowance from earned income?


£2,880.

See, for example, https://www.bestinvest.co.uk/pensions/s ... -allowance

Pension carry forward

Pension carry forward rules let you make contributions above your annual allowance. If you paid in less than your annual allowance in any of the past three tax years you can carry forward the unused allowance, as long as you had a SIPP or other pension in place for each of the three years and your total contributions don’t exceed your current earnings.


Subject to the other restrictions summarised there.

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Re: Pension recycling

#214215

Postby ursaminortaur » April 10th, 2019, 6:41 pm

PinkDalek wrote:
JuanDB wrote:
BusyBumbleBee wrote:"The £2280 trick" ;) (as it now seems to be called) : should have added that - if you didn't make a contribution last year you can make that contribution in this tax year in addition to this years contribution.



I’m not aware you can carry forward the basic allowance, only unused allowance from earned income?


£2,880.

See, for example, https://www.bestinvest.co.uk/pensions/s ... -allowance

Pension carry forward

Pension carry forward rules let you make contributions above your annual allowance. If you paid in less than your annual allowance in any of the past three tax years you can carry forward the unused allowance, as long as you had a SIPP or other pension in place for each of the three years and your total contributions don’t exceed your current earnings.


Subject to the other restrictions summarised there.


You can only carry-forward past years if you have used up this year's annual allowance first. Hence you need to have relevent earnings of at least £40,000 before you can make use of carry-forward.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.

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Re: Pension recycling

#214339

Postby BusyBumbleBee » April 11th, 2019, 9:28 am

ursaminortaur wrote:You can only carry-forward past years if you have used up this year's annual allowance first. Hence you need to have relevant earnings of at least £40,000 before you can make use of carry-forward.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.


The new pension rules have not affected Stakeholder pension rules AFAIK.

The maximum allowable contribution to a Stakeholder Pension is £3,600 (£2,880 net) and these can be made without having any earnings at all. Essentially a non-earning wife can take advantage of these up until the age of 75 (as can anyone even if they have retired). There is some doubt as to whether you can use unused annual allowances from the three previous tax years but you can certainly use last years.

ursaminortaur
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Re: Pension recycling

#214347

Postby ursaminortaur » April 11th, 2019, 10:19 am

BusyBumbleBee wrote:
ursaminortaur wrote:You can only carry-forward past years if you have used up this year's annual allowance first. Hence you need to have relevant earnings of at least £40,000 before you can make use of carry-forward.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.


The new pension rules have not affected Stakeholder pension rules AFAIK.

The maximum allowable contribution to a Stakeholder Pension is £3,600 (£2,880 net) and these can be made without having any earnings at all. Essentially a non-earning wife can take advantage of these up until the age of 75 (as can anyone even if they have retired). There is some doubt as to whether you can use unused annual allowances from the three previous tax years but you can certainly use last years.


Sorry you are mistaken. The £3,600 (£2,880 net) contribution is allowed to any pension by someone with no relevant earnings not just Stakeholder pensions. Also those who are earning can put in up to their relevant earnings gross to a Stakeholder pension and not just £3600 gross. Stakeholder's legislation is more about having low capped charges and low minimum contribution levels.
The Stakeholder legislation does not in anyway change the carry-forward rules.

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Re: Pension recycling

#214360

Postby BusyBumbleBee » April 11th, 2019, 11:15 am

ursaminortaur wrote:
BusyBumbleBee wrote:The new pension rules have not affected Stakeholder pension rules AFAIK.

The maximum allowable contribution to a Stakeholder Pension is £3,600 (£2,880 net) and these can be made without having any earnings at all. Essentially a non-earning wife can take advantage of these up until the age of 75 (as can anyone even if they have retired). There is some doubt as to whether you can use unused annual allowances from the three previous tax years but you can certainly use last years.


Sorry you are mistaken. The £3,600 (£2,880 net) contribution is allowed to any pension by someone with no relevant earnings not just Stakeholder pensions. Also those who are earning can put in up to their relevant earnings gross to a Stakeholder pension and not just £3600 gross. Stakeholder's legislation is more about having low capped charges and low minimum contribution levels.
The Stakeholder legislation does not in anyway change the carry-forward rules.


Sorry, ursaminortaur - you are of course right - I was being lazy and using 'Stakeholder Pension' to cover all cases of contributions where there are no relevant earnings.

There was some discussion of the carry forward rules for this type of pension one the Motley Fool and a respected contributor held that you could only carry forward one year for this type of contribution which is why I raised the question mark over the number of years you could use carry forward if you had no relevant earnings

swill453
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Re: Pension recycling

#214383

Postby swill453 » April 11th, 2019, 12:39 pm

BusyBumbleBee wrote:There was some discussion of the carry forward rules for this type of pension one the Motley Fool and a respected contributor held that you could only carry forward one year for this type of contribution which is why I raised the question mark over the number of years you could use carry forward if you had no relevant earnings

I think you (or your recollection of the respected contributor) are wrong.

See https://www.pruadviser.co.uk/knowledge- ... butions-qa

Q: My client is in receipt of pension income. She does not have any relevant earnings in this tax year and would like to pay £2880 net (£3600 gross) for this year, and also £2880 net for each of the 3 earlier tax years using carry forward. Is this possible?

A: Two points here. Firstly tax relief, you cannot carry forward tax relief from an earlier tax year. Your client would only be entitled to tax relief on a gross contribution of up to £3600 in this tax year.

Secondly, the term ‘carry forward’ relates to annual allowance only. You need to fully use this year’s annual allowance (standard AA is £40,000) before you can use carry forward. Contributions in excess of 100% of relevant earnings, or £3600 whichever is greater, are not entitled to tax relief but do use annual allowance.

Scott.


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