ASK TOM Your retirement questions answered
36 | SHARES | 01 Augest 2019
AJ Bell pension expert Tom Selby explains the rules‘Is it illegal to recycle pension
money to get extra tax relief?’
similar period before tax-free
cash was taken.
You can’t get round this by
ƉĂLJŝŶŐŝŶƚŽĚŝīĞƌĞŶƚƉĞŶƐŝŽŶ
schemes as HMRC will look at
ĂůůŽĨLJŽƵƌĐŽŶƚƌŝďƵƟŽŶƐǁŚĞŶ
making its assessment.
Equally, HMRC will penalise
you for recycling if you borrow
ŵŽŶĞLJƚŽƉĂLJĐŽŶƚƌŝďƵƟŽŶƐŽƌ
pay into your pension out of
savings and then use the tax-free
ůƵŵƉƐƵŵƚŽƉĂLJŽīƚŚĞůŽĂŶŽƌ
top up savings.
Incidentally, concerns over
recycling were cited by the
Government as the primary
reason for introducing the
Money Purchase Annual
Allowance (currently set at
£4,000) for savers who access
taxable income from their
pensions.you could be hit with a 55%
unauthorised payment charge.
HMRC will consider recycling
ŽĨƚĂdžͲĨƌĞĞĐĂƐŚƚŽƉŽƚĞŶƟĂůůLJ
breach its rules where the tax-
free sum (or sums) received over
a 12-month period are worth
more than £7,500.
The rules kick in where
the payment has resulted in
a 30% or more increase in
ĐŽŶƚƌŝďƵƟŽŶƐƚŽLJŽƵƌƉĞŶƐŝŽŶ
compared to what might
normally have been expected.
While this might sound a bit
ǀĂŐƵĞ͕ŝƚ͛ƐĂĐƚƵĂůůLJĂƐƉĞĐŝĮĐ
ĐŽŶĚŝƟŽŶʹ,DZůŽŽŬƐĂƚ
ĐŽŶƚƌŝďƵƟŽŶƐƉĂŝĚŝŶƚŚĞƌĞƐƚ
ŽĨƚŚĞƚĂdžLJĞĂƌĂŌĞƌLJŽƵƚŽŽŬ
your tax-free cash plus up to
ƚǁŽŵŽƌĞLJĞĂƌƐĂŌĞƌǁĂƌĚƐ͘
This is then compared with the
ĐŽŶƚƌŝďƵƟŽŶƐŵĂĚĞĚƵƌŝŶŐĂI’ve heard that it’s possible to fall
foul of HMRC’s pension recycling
ƌƵůĞƐ͖ĐĂŶLJŽƵĞdžƉůĂŝŶƚŚĞƉŝƞĂůůƐ
and how to avoid them please?
DeanHMRC has rules in place to stop
ƉĞŶƐŝŽŶƐĂǀĞƌƐŐĞƫŶŐ͚ĚŽƵďůĞ
bubble’ on their pension tax
relief. As you say, this concept
is referred to by the taxman as
pensions recycling.
dŚĞĐŽŶĐĞƉƚŝƐƐƚƌĂŝŐŚƞŽƌǁĂƌĚ
and probably easiest to explain
with an example. Take someone
who is 65 years old and has a
SIPP pot worth £100,000. He
takes out his maximum tax-
free cash (£25,000) but then
invests it straight back into
ĂŶŽƚŚĞƌƉĞŶƐŝŽŶǁŝƚŚĂĚŝīĞƌĞŶƚ
provider.
As a result, he gets tax relief
on the money he pays into that
ƉĞŶƐŝŽŶ;ŝŵŵĞĚŝĂƚĞůLJƐƟŶŐ
it to £31,250) and can get 25%
of that money (i.e. £7,812.50)
tax-free as well. He might even
invest that tax relief in another
SIPP, and so on.
I’ve heard this wheeze
ĚĞƐĐƌŝďĞĚǀĂƌŝŽƵƐůLJĂƐĂ͚ŶŽ
ďƌĂŝŶĞƌ͛ĂŶĚ͚ƚŽŽŐŽŽĚƚŽďĞ
true’ by investors. Sadly, the
ůĂƩĞƌƉŽŝŶƚŝƐĐŽƌƌĞĐƚĂŶĚ,DZ
has rules in place to prevent
excessive recycling of tax-free
cash. If you breach these rulesDO YOU HAVE A QUESTION ON RETIREMENT ISSUES?
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AJ Bell
Senior Analyst says: