From Ian Forder, Thinking Pensions - July 2006

I’ve Got These Old Re-cycling Blues

Recycling pension commencement lump sums, like investment in residential property, and now possibly Alternatively Secured Pension, was, I suppose, one of the features of the new tax regime which was too good to be true.  And like most things which are too good to be true, HMRC eventually twigged that people might take advantage of it to increase their tax savings and took measures to block it.  The original draft guidance note issued in February this year was revised and the current (final?) version was issued just in time for A-day

Despite the twenty eight pages of guidance and examples I’m still not sure we are much further forward.

An IFA has a new client – John.  John is a self-employed consultant and although he only started this work a few months ago he is doing very well and expects to make nearly £100,000 this tax year.  He also has a number of investments including £50,000 sitting on deposit.

John likes the idea of taking advantage of the new contribution limits to pay £50,000 net into a new pension plan in order to reduce his tax bill and boost his retirement income in due course. The (simplified) arithmetic is compelling:

A net £50,000 invested is immediately grossed up to £64,102. A further £19,231 can be clawed back in the form of reduced liability to higher rate tax.  John is over 50 and decides to vest his new pension immediately, taking PCLS of £16,000 and leaving the balance, £48,000, invested as unsecured pension. So, give or take a couple of thousand pounds John has transferred £50,000 of taxed savings into a tax free investment environment, still has £16,000 on deposit and has saved £19,000 from his tax bill. 

This is all within the rules and there is no recycling of a lump sum.  However, before John became a self-employed consultant he worked for a large company where he was a member of their pension scheme. When he left last year he had the chance to take an early retirement pension on favourable terms, which he did. The lump sum was around £50,000 which he put on deposit in case he needed it to supplement his income.  As it happened, the business has been successful, and he now wants to use the £50,000 to boost his pension and save tax…….    Recycling or not?

If it can be shown that John had pre-planned for the scenario where his business was successful this, at least in theory, would breach the recycling rule because it was his intention to use the lump sum to finance a new pension. He would then be subject to an unauthorised payment charge of up to 55% of the lump sum, ie £27,500.  Furthermore, the scheme which made the original lump sum payment could be liable to a scheme sanction charge of between 15% and 40% of the lump sum, unless they had obtained a disclaimer from John when he took benefits.

I suppose there are three lessons to take from this example;

1. Nothing is simple with simplification
2. A little forward planning could be a dangerous thing
3. Scheme administrators should always get a disclaimer from members that they are not going to recycle PCLS.

For assistance with your pension problems, contact Ian Forder at thinkingpensions on 0131 447 3137 or e-mail thinkingpensions@gmail.com.

Source: HMRC draft Guidance Note on payment of pension commencement lump sums in respect of Registered Pension Schemes.
This note is based on thinkingpensions’ understanding of the legislation and should not be construed as a definitive interpretation. The effect of charges on benefit amounts has been ignored and some calculations have been simplified.

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