What is pension recycling ?

What exactly is classed as pension recycling !

This is where an individual decides to reinvest their tax-free lump sum. Or some pensionable income back in a pension scheme that they may have.

So why is this a problem ?

By re-investing the funds back into a pension wrapper which is considered tax-free and IHT free. It could generate additional tax relief from the UK government which has previously been applied earlier. Whereby somebody could then gain fresh entitlement to a 2nd tax-free cash lump sum or accrue additional pension benefits.

This action is governed by legislated by rules in place by HMRC. Based upon information and records provided by pension providers to them.

What about tax-free cash recycling !

The rules in place are not intended to deter people investing into a pension scheme. Whether that may be personal or through their current employer. But it is seen as being fair and transparent as part of your contributions within your pension.

Individuals are currently restricted to Annual allowance of £ 60,000 per tax-year into a personal pension. Or lower amount if earning a lesser salary. Plus you can use unused allowances over the past 3 years. As long a you were a member of a registered pension scheme. However though, most people are nowhere near this level of allowance. So the rules and allowances are considered generous enough already.

What HMRC does object to, is to allow individuals to re-invest tax-free lump sum. So they can then substantially be allowed to increase their pension funding levels by certain actions.

So what rules currently apply ?

The first point to note, is if the idea of re-investing funds back into a new or separate pension scheme is pre-planned. A simple example somebody has made a conscious or deliberate plan or action. To intentionally accrue extra pension benefits to, by greatly enhancing the level of contributions. To which they previously made into a scheme compared to previous years.

HMRC or the pension provider may consider the reasons or motivation and action steps taken by an individual, as part of the pre-planning stages. Did the member intend this action on purpose ?

If the idea of recycling was consider pre-planned. Then HMRC will deem to apply an unauthorised payment charge on the individual. Which could apply to the tax-free lump amount taken if the following limits are exceeded:

• The tax-free cash taken is more than £ 7,500 (within the past 12 month period)
• The total increases in pension contributions within the last tax-year is at least 30% of the tax-free lump sum withdrawn, will also include past 2 years.
• The amount of pension payments made are significantly larger than those expected (normally classed as 30% being the increased amount)

So if you are going to increase contributions into a pension scheme, it may be worth trying to stick within the limits in place.

There is nothing stopping an individual from increasing contributions through the award of pay rise, bonus from employer, inheritance or savings elsewhere to boost their pension pot for later years. Because these funds have come directly from other sources, they are not being held within a tax-free pension wrapper.

On side issue, an individual can make sizeable contributions to a partners, Childs or grandchild’s pension pot (subject to their earnings and annual allowance) that is classed as normal contributions. The rules only apply to somebody paying increased funds into their own scheme.

Examples to demonstrate when recycling has not occurred:

• If contributions are funded from an inheritance
• Contributions are based on profits or earnings from self-employment
• Funded by a windfall (lottery, premium bonds, betting etc)
• Are made by a financial settlement award (divorce or compensation)
• If the action to transfer money from one scheme to another wasn’t pre-planned.

What charges can apply ?

If any of the recycling conditions are triggered, then an individual can be charged up to 55% and the pension scheme may be liable to issue a scheme sanction charge.

Unauthorised payment charges can only apply in respect of the scheme paying the lump sum, not by the scheme receiving the lump sum amount.

They can be applied it the following ways:

• Unauthorised payment charge of 40% (payable by scheme member)
• Unauthorised payments surcharge of 15% (payable by scheme member)
• a scheme sanction charge (15% payable by the scheme)

There is no definitive list of rules that can be applied and each case will be accessed by HMRC on its own merits and circumstances.

How do I inform HMRC ?

An individual if caught under the rules of recycling, must then notify the scheme administrator. Normally within 30 days of the date that the unauthorised payment has occurred.

A failure to notify could result in a penalty up to £ 300, with the addition of extra penalties up to £ 60 per day, until the scheme is notified. Which unknowingly could soon amount to a sizeable sum if not addressed.

Again, the failure to provide relevant or accurate and incomplete information could result in a penalty to the sum of £ 3,000

An individual should also inform the HMRC of this payment, either through a self-assessment income tax return if they complete one. Or else notifying their local or national tax office directly.

Examples of when recycling might be applicable:

• Paying the tax-free cash lump sum as a new contribution
• Increasing contributions by savings, then taking tax-free cash to replace those savings
• Taking out a loan to make payments into a pension scheme, and then the loan is paid back by accessing tax-free pensionable lump sum.
• If somebody takes cash free cash when loaned to a business, and the business will use that loan to then re-finance contributions at a higher level.

For most people the rules surrounding pension recycling are complex and confusing to most people, even those that work within the pensions industry. If misunderstood they could have massive financial implications of an individuals current scenario or their future plans for later years of creating greater pension provisions.

If you intentions and affairs may appear to be unclear or confusing, ahead of making any decisions it may be worthwhile sitting down with an accountant or pensions professional. To seek clarity and re-assurance ahead of making any unwisely decisions, which may prove costly.

Where can I seek extra help ?

Greater information can be found on the gov.uk link: http://www.hmrc.gov.uk/manuals/ptmanual/ptm133810.htm

If you found the above information useful, if wish to check out my blog for other posts about pensions. check them out on https://www.monyeminted.co.uk