We have become a nation of recyclers but beware – you shouldn’t recycle everything without checking the rules first!
Pension flexibility allows someone to take their benefits which have accumulated from their hard earned cash in any manner they want and has increased interest in pensions as an important part of retirement planning. The temptation is to take as much as possible and spend, spend, spend! But for many this will be wholly inappropriate. Some are taking the chance at retirement to take a lump sum to repay debts such as the remainder of a mortgage or to fund a once in a lifetime holiday, both of which seem perfectly reasonable to me.
A growing number are doing something different, taking lump sum benefits and re-investing these into another pension on which tax relief may be claimed on the amount invested and where tax free benefits may accrue including more tax free cash! Now there is nothing remotely dubious about this financial planning but, not unsurprisingly, our friends at HMRC have set down conditions that, if all are met, mean they may apply an unauthorised payment charge of a whopping 55% payable by the individual!
The conditions are broadly as follows:
- Pension contributions are significantly higher than they would have otherwise been as a result of the lump sum. This is amount is considered to be more than 30%;
- The lump sum taken (which is then re-invested) along with any other lump sums paid within 12 months, is greater than £7,500;
- The cumulative amount of the additional contribution must exceed 30% of the lump sums taken in the 2 years before or after receipt of the lump sum;
- The member is aged below 75 and the payment was not an employer contribution;
- There was an intention to make the payment i.e. this was pre-planned on which it is HMRC to prove.
So, in conclusion, in most cases there will be no ‘full house’ of the above conditions to warrant an unauthorised payment charge but it would be prudent in the first instance to check with a financial adviser to ensure that any such proposed pension planning won’t result in a hefty tax penalty.