Tax free cash + Pension contributions
GolfPutt21
Member
Hi all,
I have someone who is looking to take their max TFC from their pension now to supplement their income and then in 6 months time pay in £150,000 (carry forward included) through their employer to their pension. First question is - is there anything wrong with doing this?
Second thing is - they then want to pay in £60k per annum through employer after that and take out 25% TFC immediately to supplement their income each year - is there a problem with doing that?
Comments
You are in the murky grey land of PCLS recycling.
So if HMRC think you are using tax free cash to directly or indirectly make pension contributions greater than you normally would the PCLS is an unauthorised payment. If they do not then it's just normal planning considerations.
You need to do some sums to see if you pass any of the arithmetic tests and then you don't need to bother about recycling rules if you do.
https://www.mandg.com/wealth/adviser-services/tech-matters/pensions/lump-sum-options/pension-recycling
Without knowing anything other than what you've disclosed I would say that, based on the figures you're talking about, all the quantitative tests will show this is recycling.
The remaining test is whether it was 'pre-planned'. It seems to be that it is.
Your final statement is literally describing the planned (all planning is 'pre') action of taking out tax-free cash and then indirectly paying it back in.
I am finding it difficult on the first point having read many articles about PCLS recycling because they need money now for personal cashflow and pension is only real funding option but are director of limited company which owns properties and are in process of selling a property which once sold will have profits available to fund the pension which is the plan. So the PCLS isn't to recycle to the pension its to feed their personal funds then to extract profits from the company.
Perhaps a phased approach (e.g. Phased Flexi-Access Drawdown) to meet their monthly outgoings would be less grey? That way, you have a direct link to spending, and presuming an income source will reappear once the property is sold, you would have continuity of income?
They can take that money out of the company other than via a pension eg as a dividend.
It's more that they need money right now to cover bills etc and they don't know when the property in the business will be sold. So in theory the house sale could happen in 6-12 months or even longer but they need some money right now, so they have more scope to draw from company when property is sold but no one knows when that will be so could be left short for 6 months or 12 months or even longer.
> Perhaps a phased approach (e.g. Phased Flexi-Access Drawdown) to meet their monthly outgoings would be less grey? That way, you have a direct link to spending, and presuming an income source will reappear once the property is sold, you would have continuity of income?
Wouldn't this trigger mpaa and limit future contributions anyway?
Yes it is, sorry may have confused it.
They need money from the pension now for cashflow and don't have enough to extract from business at the moment. Once the property is sold the business will have profits which they can then extract from via dividends etc but will also want to pay a large sum in to pension from the profits also.
Unless you take from Mr now and fund Mrs from the company, or vice versa. You can only recycle into a pension you are the member of.
All very interesting. My opinion is that on this basis there in not intention to use the TFC to recycle, it's for personal use and their is no link between the TFC money and the employer money
Contributions are made by or on behalf of the member.
Nothing else matters, other than whether it was planned. Which on the facts of this case, it will have been.
Thanks @benjaminfabi, you have been very helpful on this. Would it still be considered if they drew down the TFC monthly?
No worries. This topic is always difficult because it's hard to bring everything down to the two simple transactions:
Nothing else around why the tax-free cash was taken, or how the contributions were made, outside of the recycling tests, is relevant. Paying down a mortgage, gifting, using it to meet living costs etc are all immaterial.
In terms of your query about monthly PCLS, you'll need to run the amounts against the tests and decide based on the facts.
There are minimum levels of pension funding that are possible without recycling taking place.
Ultimately you have to ask yourself would we win at a tax tribunal if we had to defend that it was not pre planning.
I suspect that's a high bar.
This has been a very useful thread for me today.
The two remaining questions I have are, if TFC recycling is deemed to have occurred and the PCLS taken becomes an unauthorised payment, what happens to their LSA and the now crystallised fund?
Thanks!
There is no provision for unauthorised payments to be included in LSA/LSDBA so the only possible answer is the LSA/LSDBA used is reduced as it was a UP not a PCLS.
The crystallised fund remains crystallised.
Thanks Les. This is what I thought.