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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: significant increase in contributions and cumulative basis

Glossary PTM000001
   

What is a significant increase in contributions?
What is the cumulative basis on which the significant increase of contributions is based?

What is a significant increase in contributions?

Paragraph 3A Schedule 29 Finance Act 2004

One of the conditions for the recycling rule to apply is that there is a “significant increase” in the amount of contributions paid:

  • by the member to any one or more registered pension schemes
  • on behalf of the member to any one or more such scheme (for example, where the spouse of a member makes contributions on behalf of that member), or
  • by an employer or employers in respect of the member to any such scheme.

(Including any combination of the above.)

As a rule of thumb, H M Revenue & Customs accepts that such a significant increase does not occur unless, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might otherwise have been expected.

The amount of additional contributions is measured on a cumulative basis to determine whether or not a significant increase has occurred. See below for more information about the cumulative basis.

The underlying principle of whether or not there is a significant increase in the amount of contributions is, first, to establish the amount of contributions that might have been expected to be paid in the absence of a pension commencement lump sum and then compare that amount with the contributions that have been paid as a result of receiving the lump sum.

The fact that there has been a significant increase in contributions in conjunction with the taking of a pension commencement lump sum that, itself or together with other such lump sums taken in the previous 12 months, exceeds £7,500 (or 1% of the standard lifetime allowance before 6 April 2015), does not necessarily mean the recycling rule will be triggered. Even though such an increase might be a significant increase, this would not trigger the recycling rule where the significant increase is not as a result of taking the pension commencement lump sum.

For example, an individual’s contribution pattern might vary from year to year but the basis on which those contributions are paid does not change. Another example would be where an increase is, in effect, beyond the control of an individual, such as where contractual contributions in respect of the membership of a particular scheme are increased across the board for all active members of that scheme. These increases may be significantly greater than the previous year’s contributions, but the increases are not “because of” a pension commencement lump sum, and so the recycling rule is not triggered.

Note, the recycling rule does not apply where significantly greater contributions have been paid because of a pension commencement lump sum provided the 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.

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What is the cumulative basis on which the significant increase of contributions is based?

An individual planning to increase contributions significantly to a registered pension scheme when taking a pension commencement lump sum does not avoid the “significant increase” test by increasing contributions piecemeal or gradually over time. It does so by providing for contributions to be measured over a set period of time in determining whether or not there has been a significant increase in contributions.

The period of time is:

  • the tax year in which an individual takes a pension commencement lump sum with the intention of using it to make significantly increased contributions to a registered pension scheme
  • the 2 tax years immediately preceding the tax year in which the individual took the lump sum, and
  • the 2 tax years immediately following the tax year in which the individual took the lump sum.