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HMRC moves to close pension lump sum recycling loophole

HMRC has confirmed ‘stand-alone’ pension lump sums will not be subject to the restricted money purchase annual allowance rules imposed on savers who access the Budget freedoms.

Stand-alone lump sums are the withdrawals savers who were entitled to take all their uncrystallised pension rights as a lump sum on A-Day, 5 April 2006, can make.

The Revenue has confirmed savers who take these lump sums will still receive an annual allowance worth £40,000, rather than the reduced £10,000 afforded to people who access new pension flexibilities from April next year.

However, stand-alone lump sum withdrawals will trigger the reduced allowance if the member has primary protection, but not enhanced protection and protected lump sum rights exceeding £375,000, the tax office says.

Responding to a written question submitted to a pensions industry stakeholder meeting, HMRC explains the rule is needed to stop people recycling their pensions and exploiting tax relief.

It says: “This rule is needed as those in this position can often organise how they take their benefits in such a way as to take their tax-free lump sum up front through a stand-alone lump sum without taking any pensions. These monies could then be contribution back into a pension scheme with additional relief.

“As the purpose of the annual allowance rules is to prevent people accessing funds and effectively recycling them, it is right that receiving such a payment triggers the money purchase annual allowance rules. In practice we expect there to be very few of these payments.”

To qualify for primary protection savers had to have £1.5m of pension rights at A-Day. People who took out primary protection were able to contribute more than the normal lifetime allowance and could continue to accrue benefits.

In addition, if they had over £375,000 of tax-free cash, they could also choose to have this protected. Primary protection gave savers a protected monetary value of tax-free cash, which could be taken at any point without reference to the level of benefits being crystallised at the time.

Enhanced protection, on the other hand, had no minimum saving requirement, but meant savers had to generally stop accruing benefits or making contributions. The associated protection for those who had over £375,000 in tax-free cash was expressed as a percentage, rather than a monetary amount.



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Have I missed something here? I thought HMRC already penalised recycling of tax-free cash lump sums, if the amount of the contribution exceeded 1% of the lifetime allowance (so currently £12,500 and reducing to £7,500 from April 2015). Also if a contribution exceeded previous contributions by more than 30% or if the contribution exceeded 30% of the tax-free lump sum.

  2. @ Hampshire Mum

    There is no way they can really stop recycling. Take your own (or my own) case. I presume you are a working Hampshire Mum? May I presume you have a husband or partner? May I presume he works? So either of you can take you PCLS and then give it to your other half for reinvestment into their pension – if you so wish. I can do that with my wife.

    I don’t know about you but in may family what’s hers is hers and what’s mine is hers – so it’s really only one pot!”

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