Joslin Rhodes
18:58, Sun 5th February 2012

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01642 52 55 11

Tax free cash recycling

The sharper amongst you may have noticed a potential loophole for generating more and more tax relief. What if you took your 25% tax free cash from your pension and then invested it back into another pension and claimed the 20% or 40% tax relief on the contribution? You could then immediately take 25% of that pot and repeat the procedure indefinitely.

 

 

 

Unfortunately the treasury thought of that one first and have put rules in place to stop you doing so.

 

The process is known as ‘tax free cash recycling’ and applies if: 

 

o The individual receives a Tax Free Cash (TFC) lump sum OR;


o Because of the TFC sum, the amount of contributions paid into a registered pension scheme in respect of the individual is “significantly greater” than it otherwise would be OR;


o The additional contributions are made by the individual or by someone else, such as an employer OR;


o The recycling was ‘pre-planned’.


 

For the new rule to apply, all of the following must also apply:

 

o Within the previous 12 months, the total TFC taken is greater than 1% of the lifetime allowance (£18,000 in tax year 20010/2011);and


o Pension contribution increases, invested into the same or different registered pension plan(s), are greater than 30% of this TFC sum; and


o Pension contributions made are significantly (generally 30%) higher than might have been expected to be paid, in the absence of the TFC sum.


o Excessive contributions will be tested against the current year, the previous 2 tax years and the next 2 future tax years.

 


The deemed unauthorised payment will trigger an unauthorised payments charge of 40% and, possibly, the unauthorised payments surcharge 15%. So you can see how expensive it is to get it wrong. Not only do you have to pay back the tax relief but you also get a punishment tax for being naughty.

There are ways to recycle tax free cash within the rules, you just need to get your calculations right. Call the pension helpdesk on 01642 525514 for more information.

If you have an old or frozen pension plan then you should have it reviewed by the qualified experts.

You may be able to:

  • Increase the value of your pension
  • Unlock your pension
  • Consolidate your plans
  • Save £thousands in pension charges
  • Access better performing funds
  • Release tax free cash from your plan
  • Receive an immediate income
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