Another recycling issue

[NeilOne]

I received an inheritance in 2017 and decided to move this into a SIPP as well as an ISA (both for my wife and myself). Since 2019 the contributions have been the same each year at 36k , most of my salary, until last year when increased by 4k up to the max of 40k (gross contributions).

This tax year I received 98k PCLS from a defined benefit pension. It did not occur to me at the time that this would break the recycling rules, but have some doubts now. It comes down to whether I have increased contributions by more than 30% on a cumulative basis. If I understand correctly then the increase from 2017 does not count but only the increase over the last 2 years (and potentially current and next 2 years). So as it stands the 4k increase is below the 30% threshold.

[flyer61]

I wouldn't worry about it. Yet to meet anybody who has fallen foul of anything to do with recycling.

[NeilOne]

The thing is am not sure if I have as some of the conditions are not clear, things like what would the contributions have been without the PCLS.

[bucklb]

The recycling rules have stuff specifically exempting windfalls that are used to ramp up contributions. You presumably wouldn't have known the windfall was due, so difficult to plan that. The bit they ram home about recycling is that it's PLANNED recycling that's bad (and recycling as part of "normal" retirement planning is OK, without giving any idea what normal pension planning looks like )

IMH(but unqualified)O the fact that you've been contributing £36k p.a. for a while means that is your "normal" contribution. I'd say you'd be able to add £12k extra across the years before risking crossing the cumulatively "30% more than usual" barrier

The get out of jail card always seems to be that any "extra" contributions have to make up 30%+ of the PCLS, so approx £30k+ in your case. That would cover 7 years of the "extra" £4k contribution; only 5 years of extra contribution are in scope anyway - the tax year that the PCLS is received & 2 years either side - so it should be fine.

In your positionI'd be slightly reassured by the above, but wary nonetheless.

[NeilOne]

Thanks for your thoughts bucklb , I think I have reached similar conclusions but unsure what HMRC interpretation is for what my normal contribution is (is 4 years enough to establish that -maybe).

[bucklb]

That's the $64,000 question I suspect.

If it were me looking at this from a PCLS recycling angle, I'd see the £36 p.a. contribution you've been making for a few years as related to the inheritance (and as an inheritance, that it's off radar). I'd probably say it was "usual" and especially if you were to keep paying it (and potentially more) for another year or two, but I have no idea if that's an option for you.

But I'm not HMRC, so the fact that I'd see 2 ways this isn't a problem (normal contributions as function of inheritance and "extra" being less than 30% of PCLS) doesn't mean they would too.

[wanderer]

What's the worst that could happen if HMRC were to see it as recycling? It seems to me that when people exceed their annual pension contribution limits, all that happens is you are taxed so that the excess relief is clawed back. No great shakes, surely?

Best just to sit tight and see what happens, I would say.

[NeilOne]

The worst that could happen is the SPLS is an unauthorised payment and is taxed (possible some penalty as well ). So would lose over half of the SPLS. I was originally intending to make maximum contributions for a couple of years until I stop work.

[NeilOne]

I would definitely want to pay for a couple of years while still working ( I had planned to do so)

I'd probably say it was "usual" and especially if you were to keep paying it (and potentially more) for another year or two

[bucklb]

You might get some reassurance from the later parts of the limk below (but you have to claim to be a financial adviser to get to it)

https://www.investcentre.co.uk/articles ... g-pensions


It seems to suggest there's been no cases go through court to judge the recycling stuff against and that most PCLS aren't really visible to HMRC anyway. HMRC say themselves that

It should be noted that very few lump sum payments will be affected by this recycling rule

I'm feeling a little more sanguine about the whole PCLS picture. Not settled or content, just a little more sanguine