I have a question about SIPP contributions I can make after taking a tax free lump sum (25%) to ensure I don’t accidently fall foul of recycling rules
What I would like to do
I have retried so I am not an earner. Tax Relief for non-earners: If you have no UK relevant earnings, you are limited to tax relief on a gross contribution of £3,600 (£2,880 net). This applies to me.
So, having taken my25% tax free PCLS (Pension Commencement Lump Sum) I would like to contribute £3,600 (£2,880 net) back into that SIPP (well, a ‘new’ uncrystallised version). I want to do this in FYT023 (and annually hereafter)
But I don’t want to accidentally fall fowl of tax recycling rules (I found a Hargreaves Lansdown fact sheet here: https://www.hl.co.uk/__data/assets/pdf_ ... tsheet.pdf)
The rules on Recycling are:
You could incur a tax charge if ALL of the following happen:
- • [TICK!] you take tax-free cash from a pension,
• [TICK!] as a result of taking tax-free cash, the contributions paid into a pension are significantly greater than they would otherwise have been (see ‘What counts as a significant increase?’ below),
• [potentially TICK!] the recycling was pre-planned (HMRC will consider each case and any evidence which points to preplanning),
• [TICK!] the amount of tax-free cash you take, together with any tax-free cash taken in the previous 12 months, exceeds £7,500 and;
• [No!] the cumulative amount of the additional contributions exceeds 30% of the tax-free cash (contributions in the year of retirement or the two tax years either side)
Which of the above apply to me:
[Note: I’m unclear whether my “contribution” counts as £3600 (gross) or £2,880 (net). For now, I assume worst case of £3600.]
- • Did I take tax-free cash from a pension: YES
• Was this preplanned?: No, I only thought of it after taking the lump sum. However, there’s no way I can demonstrate that. My actions are indistinguishable from if I did preplan. So, let’s assume “YES”
• Would the contribution be a ‘significant increase’? : I have only ever made one contribution to my SIPP account (in 20/03/2009). After that it just grew. So ‘any contribution’ is a ‘significant increase’, so YES
• Did the amount of tax-free cash you take, together with any tax-free cash taken in the previous 12 months, exceed £7,500: YES
• Would the cumulative amount of the additional contributions exceed 30% of the tax-free cash? No.
- o The Pension Commencement Lump Sum (PCLS) was just under £91k.
o If I take the figure of £3600, that is just under 4% of the PCLS. So, for five rolling years the cumulative total is just under 20%. That’s less than 30% so, I’m OK
Questions
1. Have I made any mistakes in my thinking above?
2. Can I (annually) contribute £3,600 (£2,880 net) into my SIPP?
3. Should the calculation of 5 years contributions be [5 * £2880] or [5 * £3600]?
While I plan to pay £3,600 (£2,880 net) into my (uncrystallised) SIPP I’m also planning to drawdown (approx.) £12k from my crystallised SIPP (that I’d previously taken the PCLS from)
4. Is this ok? It looks odd to me that I would be paying into my SIPP and drawing down from it at the same time
Thanks
Pete
