I am somewhat confused about the pension recycling rules.
I am 55 and planning on an early retirement during the course of the next 12 months.
I am considering putting a sizeable amonunt of cash into my SIPP, benefitting from the HMRC uplift, then effectively withdrawing the same amount of cash as part of my 25% tax free cash allowance shortly after 'retiring'.

I have been told that this manoeuvre might attract hefty penalties under the pension recycling rules (even if I don't make any further investments into my SIPP) and even though I will be taking the tax-free tax AFTER having put it in beforehand.

This doesn't seem to make sense to me, but grateful for any clarification. I am intending putting ca. £50k cash into my SIPP.

Thanks.

I disagree with Pension Man here.

The RPSM which he refers to says: (RPSM04104920)

"The recycling rule applies when all of the following conditions are met:

•the individual receives a pension commencement lump sum,
•because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be.
•the additional contributions are made by the individual or by someone else, such as an employer,
•the recycling was pre-planned. .
•the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12 month period, exceeds 1% of the standard lifetime allowance, and
•the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum"

It goes on to say:(RPSM4104930

"Alternatively, when an individual takes these steps:

•decides to use a pension commencement lump sum as the means to significantly increase contributions to a registered pension scheme, and then
•pays the significantly increased contributions or otherwise arranges for them to be paid, and then
•receives the lump sum
pre-planning occurs when the significantly increased contribution is made - this is the “relevant time”."

As I see it this is exactly your position. You do not have sufficient cash to fund the pension contribution and you are planning to take the tax free cash to fund it. HMRC have made it very clear that you cannot get around the rules simply by paying the contribution before you take the tax free cash.

The questions I would need to ask to be sure about this are:

What contributions have you paid into your SIPP (or other pensions)?
How are you planning to fund the £50k contribution?

It may be that the way you have described things is unfavourable to you, but otherwise you will be caught - if anyone spots what you have done or you tell your HMIT about it. I think that applying for higher rate tax relief could make things problematical for you.

Mr PM,

I think it is, based on RPSM4104930, but that was why I asked how he planned to fund his £50k contribution.

This is from RPSM4104980

"Example 2 - Other money available when pension commencement lump sum used to fund increase in contributions
An individual intends to use a pension commencement lump sum of £35,000 that he is able to take from a registered pension scheme to fund a significantly greater contribution of £40,000 to another registered pension scheme in the run-up to the end of the 2006/07 tax year. The individual has more than £40,000 available savings and so could make that contribution using those savings, but to do so would mean using up most of those savings, and so instead takes the £35,000 pension commencement lump sum and uses that. The fact that the individual had other available money that could have funded the significantly greater contribution does not mean the recycling rule is avoided.

The recycling rule would also apply if, instead of funding the contribution directly from the lump sum, the individual takes the money that pays the contribution out of the available savings, and then, uses the £35,000 pension commencement lump sum to replenish those savings.

Despite paying the increased contributions from existing savings, the recycling rule is triggered because the individual always intended the pension commencement lump sum to be an integral aspect of providing the means, albeit in an indirect way, to pay those increased contributions.

In both situations in Example 2, the significantly greater contribution is made “because of” the pension commencement lump sum, and this was planned by the individual from the outset.

But, as RPSM04104925 says, it is not enough to establish that recycling has occurred for the pension commencement lump sum to be paid into the same bank account as that from which the savings were taken to pay the increased contributions. This does not of itself mean that the contributions have been made “because of” the lump sum. HMRC has to show that the individual intended to use the lump sum as the indirect means of making those increased contributions. "

My friend X has recently been made redundant and is considering whether to starrt a SIPP with the £9,000 of redundancy compensation that would otherwise be taxable at his highest marginal rate of tax. He is also considering contributing, from savings accumulated from earnings and investments, the balance of his income that would otherwise be taxable at 40%. In total, this would amount to perhaps £20,000.
As part of the redundancy deal, he was obliged to take early retirement and elected to take the maximum tax-free cash sum, most of which he has invested. His occupational pension is sufficient to cover immediate outgoings.
Since none of the money he is considering investing in a SIPP will derive from the pension commencement lump sum, will he fall foul of the recycling rules?
Assuming he is only able in future years to make small contributions to the SIPP (of about £3,000 p.a.), is it worth starting a SIPP at all? He does not expect to need to draw cash or income from the SIPP within the next 5 years.

I don't know the precise HMRC rules, but I do know the old adage .."if it walks like a duck and quacks, then it's ......." In Mr Jurek's case, he certainly appears to be trying to uplift the tax-free element by putting in money just before taking it back out. So it certainly to my mind smacks of so-called "recycling".

Look at it differently - from a risk perspective. Getting investigated by HMRC is generally taken to be a painful and expensive process. Are you so desperate that you need to take that risk in order to fund early retirement, or are you being avaricious?

A low risk option is to take zero tax-free cash out of the SIPP scheme. Then you could put all the £50K ex the AVC's - or as much as you feel comfortable with - into the SIPP without risk of running the recycling gauntlet.