Pensions and tax
Pension lump sum recycling
When you access your pension, in addition to an income you might receive a tax-free lump sum often known as a Pension Commencement Lump Sum or PCLS.
Recycling of your pension tax-free lump sum (PCLS) happens when you use that lump sum as the means to increase contributions significantly to a pension scheme.
Please note that this information relates only to the recycling of the tax-free lump sum to increase pension contributions.
HM Revenue & Customs (HMRC) has stated that very few lump sum payments should be caught by this recycling rule. Contributions should not be caught if they are part of an individual’s normal retirement planning.
The recycling rule applies when all of the following conditions are met:
- the individual receives tax-free cash from their pension
- because of the lump sum, the amount of contributions paid into a pension scheme 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 tax-free cash, taken together with any other such lump sums taken in the previous 12 month period, exceeds
- £7,500 for events on or after 6 April 2015, or
- 1% of the standard lifetime allowance for events before 6 April 2015
- and, the cumulative amount of the additional contributions exceeds 30% of the tax-free cash amount.
All of the conditions need to be met for the contributions to be classed as recycling. If all 6 conditions are not met, no recycling has occurred. Where recycling is found to apply this can result in large tax charges.
HMRC will generally consider contributions to be “significant” where they are 30% more than expected. Also, the duty is on HMRC to prove that “pre-planning” took place.
As this can be a very complex area, you should seek regulated financial advice if you think recycling may apply to you.
Further guidance on recycling, including examples and further detail on what constitutes a significant increase in contributions and pre-planning, is available from HMRC
The usual Annual Allowance rules on contributions also apply in addition to the above.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.