Joslin Rhodes

23:09, Fri 30th July 2010

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Tax free cash recycling

There are rules about ‘recycling’ tax-free cash within your pensions. Recycling is where tax-free cash is withdrawn from a pension and then reinvested in the same or a different plan in order to receive further tax relief.

 

The recycling rule applies when: 

  • The individual receives a TFC lump sum OR;
  • 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;
  • The additional contributions are made by the individual or by someone else, such as an employer OR;
  • The recycling was ‘pre-planned’.

 

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

  • Within the previous 12 months, the total TRC taken is greater than 1% of the lifetime allowance (£16,500 in tax year 2008/2009);and
  • Pension contribution increases, invested into the same or different registered pension plan(s), are greater than 30% of this TFC sum; and
  • Pension contributions made are significantly (generally 30%) higher than might have been expected to be paid, in the absence of the TFC sum.


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 (40%) and, possibly, the unauthorised payments surcharge (15%).