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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Unauthorised payments: Deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: overview

Glossary PTM000001
   

Recycling
When does the recycling rule apply?
When recycling applies in practice
Circumstances where the recycling rule does not apply
Non-UK resident individuals and members of overseas pension schemes

Recycling

Recycling of a pension commencement lump sum involves using that lump sum as the means to increase contributions significantly to a registered pension scheme. The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax relieved, contribution to a registered pension scheme.

When the recycling rule applies all or part of the pension commencement lump sum is treated as an unauthorised member payment for tax purposes. PTM134100 gives further guidance on the tax treatment of the deemed unauthorised payment.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

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When does the recycling rule apply?

Paragraph 3A Schedule 29 Finance Act 2004

The recycling rule applies in respect of all pension commencement lump sums paid on or after 6 April 2006, where those lump sums are used as part of a recycling device, regardless of when the significantly increased contributions are actually paid. 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. Further guidance about what is a significant increase in contributions is at PTM133830
  • the additional contributions are made by the individual or by someone else, such as an employer
  • the recycling was pre-planned. Further guidance about determining whether the recycling was pre-planned is at PTM133820
  • the amount of the pension commencement lump sum, 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 pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at PTM133830

It should be noted that very few lump sum payments will be affected by this recycling rule. Pension commencement lump sum payments will not be caught if they are paid as part of an individual’s normal retirement planning.

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When recycling applies in practice

Scope of the recycling rule

The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum.

The recycling rule will apply where an individual envisages recycling a pension commencement lump sum by any means; from simply reinvesting the lump sum back into a registered pension scheme by way of a relievable pension contribution paid by the individual, through to the use of any devices, schemes, arrangements and understandings of any kind, whether or not legally enforceable, that enable the effective recycling of a pension commencement lump sum.

If a pension commencement lump sum is taken as part of a structured and pre-planned arrangement for paying significantly greater contributions to a registered pension scheme, the fact that the individual has other funds from which the significantly greater contributions are paid or could have been paid does not mean that the recycling rule is avoided.

Examples that illustrate situations where the recycling rule applies are given at PTM133850

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Circumstances where the recycling rule does not apply

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.

The mere fact that the pension commencement lump sum is paid into the same bank account as that from which savings were taken to make the increased contributions does not of itself mean that the contributions have been paid “because of” the lump sum. The individual must still be shown to have intended to use the lump sum as the indirect means of making the increased contributions.

The recycling rule is not intended to apply to individuals who simply increase contributions to registered pension schemes (or who have increased contributions paid in respect of them, such as by way of salary or redundancy sacrifice) with the intention of increasing the benefits that will ultimately be paid from those schemes, particularly a pension commencement lump sum. This is provided no pension commencement lump sum is actually used as the means to increase those contributions, whether in a direct or indirect way. This is because the recycling rule applies only where contributions are significantly increased “because of” the lump sum.

The recycling rule does not apply where an individual takes a pension commencement lump sum and, when taking that lump sum, had no intention of using the lump sum as a means, whether directly or indirectly, to pay contributions into a registered pension scheme. This is because the recycling rule applies only where the recycling was planned before the first relevant transaction.

Also, the recycling rule does not apply where significantly greater contributions have been paid because of a pension commencement lump sum provided lump sum was paid on or after 6 April 2011 and the member had reached age 75 when those contributions are paid and none of those contributions were paid by an employer of the member.

Examples that illustrate situations where the recycling rule does not apply are given at PTM133860

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Non-UK resident individuals and members of overseas pension schemes

Recycling and non-UK resident individuals

Recycling devices involving pension commencement lump sums paid to non-UK resident individuals will be treated no differently from those devices involving UK residents. The fact that an individual who is not resident in the UK is using the recycling device will not, by itself, be relevant in deciding whether the recycling rule applies. The unauthorised payments charge, unauthorised payments surcharge (if applicable) and the scheme sanction charge will also apply.

Recycling and members of overseas pension schemes

The “member payment charges” in Schedule 34 of Finance Act 2004 apply the unauthorised payments charge to members of certain overseas pension schemes that have benefited from UK tax relief as if the overseas pension scheme were a registered pension scheme. This means that the recycling rule could potentially be triggered where, for example:

* an individual takes a pension commencement lump sum from a registered pension scheme and recycles it into an overseas pension scheme (if tax relief were available on the recycled contribution), or
* an individual benefiting from migrant member relief recycles a pension commencement lump sum from an overseas pension scheme into the same or another overseas pension scheme, or a UK registered pension scheme.