PCLS Recycling Rules

[OLTB]

Morning all - may I ask if anyone knows the answer re one of the rules for recycling?

An online calculator indicates that if I take tax-free cash from my pension, repay my mortgage and divert what was being paid to my mortgage each month back into my pension, I end up with a larger pension pot compared to leaving things as they are. I assume this is to do with new contributions qualifying for the immediate 20% tax relief and a further higher rate tax relief via my tax return.

I seem to break every recycling rule apart from new pension contributions exceeding 30% of PCLS - what I don't know is if there is a time constraint on this 30% rule? Is it just for additional pension contributions in the first year, two years, three years? I can't seem to find out the answer to this question and wondered if anyone else knew?

Many thanks, OLTB.

[ursaminortaur]

Morning all - may I ask if anyone knows the answer re one of the rules for recycling?

An online calculator indicates that if I take tax-free cash from my pension, repay my mortgage and divert what was being paid to my mortgage each month back into my pension, I end up with a larger pension pot compared to leaving things as they are. I assume this is to do with new contributions qualifying for the immediate 20% tax relief and a further higher rate tax relief via my tax return.

I seem to break every recycling rule apart from new pension contributions exceeding 30% of PCLS - what I don't know is if there is a time constraint on this 30% rule? Is it just for additional pension contributions in the first year, two years, three years? I can't seem to find out the answer to this question and wondered if anyone else knew?

Many thanks, OLTB.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

3. the cumulative amount of the additional contributions exceeds 30% of the PCLS

The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

[OLTB]

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

3. the cumulative amount of the additional contributions exceeds 30% of the PCLS

The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

Thank you ursaminortaur - just what I was after.

OLTB.

[OLTB]

Do you think the rule regarding two full tax years preceding the PCLS date is to do with carry forward issues only (i.e. if I'm only increasing contributions from the month after the PCLS is paid there's no reason to look backwards as there won't be any increased contributions?).

Cheers, OLTB.

[ursaminortaur]

Do you think the rule regarding two full tax years preceding the PCLS date is to do with carry forward issues only (i.e. if I'm only increasing contributions from the month after the PCLS is paid there's no reason to look backwards as there won't be any increased contributions?).

Cheers, OLTB.

I think the inclusion of the previous two years is really meant to catch out the clever b*gger who might otherwise think that they could increase contributions massively for those two years even if it meant getting into debt and then having received the tax free cash pay off that debt.

[Degsy67]

I have a recycling question too. Hope the OP doesn’t mind me using this thread with a follow on.

I understand that the pension recycling rules are designed to cover PCLS recycling as well as recycling of pension income.

I took a high percentage (but not 100%) of my PCLS last year but didn’t put the crystallised funds into drawdown. I paid PCLS funds into my mortgage and continued to contribute earned income into my pension to receive pension tax relief. I very carefully checked that I didn’t breach the PCLS recycling rules. This was checked and confirmed (in writing) by an IFA.

I’m now approaching Year 2 of retirement and looking at my drawdown plans for the coming year. I have cash sat in savings accounts but I’m planning on taking £12,570 out of my SIPP at some point this coming tax year as this matches my personal tax allowance and I have no other forms of taxable income. I’m just trying to get my head around what I can and can’t do regarding pension contributions.

As I don’t have any other forms of income (no other pensions, no rental income, no salary income, no unsheltered investment dividends) I understand that any pension contribution is limited to £2,880 grossed up to £3,600 with £720 tax relief. I haven’t triggered MPAA yet but I will do at the point that I take income from my SIPP. My income plans for the year mean that I won’t be paying any income tax.

Is there anything which prevents me from paying in £2,880 at the start of the tax year and receiving the £720 tax relief before drawing out the £3,600 + £8,970 = £12,570 later in the year? Are there any issues if the transaction order is flipped - ie, withdraw £12,570, trigger MPAA, pay in £2,880, take the tax relief in Year 3? I’m confident that I won’t trigger the ‘greater than 30% of PCLS’ recycling rule.

If I take the £12,570 first this means I have an income and trigger MPAA. With the new MPAA set at £10,000, if I can avoid the ‘greater than 30% of PCLS recycling rule, would I be able to contribute £8,000 into the pension to receive £2,000 of tax relief?

I understand that the PCLS recycling rules include a rule which states that the recycling shouldn’t be pre-planned and I’m clearly doing some income planning! I noticed however on Pru Adviser that income recycling may be a legitimate approach and has some benefits as it enables uncrystallised funds to be ‘topped up’ through a drip feed approach:

https://www.mandg.com/pru/adviser/en-gb ... -recycling

Given that the LTA will be scrapped, this appears to be an interesting opportunity but I have a feeling that I’m missing something obvious.

Thoughts welcomed.

Degsy

[Tedx]

I believe that HMRC have to prove that pension tax free cash recyling was the intention from the outset

[Degsy67]

Apologies. Partly answering the last part of my post myself but hopefully this is useful for others here too:

https://techzone.abrdn.com/public/pensi ... -free-cash

It’s important to note that pension income is not classed as relevant UK earnings, (i.e. it’s not income from employment/self-employment) and is non-pensionable. A client would need to have sufficient relevant UK earnings to justify contributions above £3,600 per tax year.

So forget the ‘up to the £10k MPAA’ above. Can’t be done without other sources of income. But the £3,600 appears to be OK.

Any follow on thoughts?

Degsy

[swill453]

Apologies. Partly answering the last part of my post myself but hopefully this is useful for others here too:

https://techzone.abrdn.com/public/pensi ... -free-cash

It’s important to note that pension income is not classed as relevant UK earnings, (i.e. it’s not income from employment/self-employment) and is non-pensionable. A client would need to have sufficient relevant UK earnings to justify contributions above £3,600 per tax year.

So forget the ‘up to the £10k MPAA’ above. Can’t be done without other sources of income. But the £3,600 appears to be OK.

Any follow on thoughts?

Degsy

I don't have a reference, but I definitely recall it being stated, probably on the old TMF boards, that if you only contribute the £2880/£3600 to your pension, the recycling rules will not be breached.

I certainly don't think it'll matter what order you do things.

Scott.