For example, if a member borrowed money in order to make an increased contribution, received a PCLS, and used some or all of the PCLS to pay off the loan, this would put it in the ballpark of recycling.
In terms of how HMRC might identify recycling cases, there are a few points to note.
Firstly, there is no requirement on scheme administrators to monitor for recycling or report suspected cases. Recycling is a unauthorised payment, so a scheme administrator would have to report it if it took place. However, the administrator’s unlikely to have the full facts, so would be reliant on the member notifying them.
In terms of broader detection measures, HMRC will of course have details of tax relief granted on all personal contributions.
However, they have less data on PCLS payments. Some PCLSs must be included on a scheme administrator’s annual report to HMRC – for example if the client is relying on a form of lifetime allowance protection – but the majority of PCLSs will not be reported.
Example 2 Steve has a defined benefit pension scheme. He has retired from the company and started taking benefits, including a PCLS, from the DB scheme. However, Steve then carries on working as a consultant. Given he has a comfortable income coming from the DB scheme, he can afford to contribute most of his consultancy income into a self-invested personal pension, with a view of eventually passing it onto his beneficiaries. On paper, HMRC could potentially view this as recycling. From the context, however, it is clear that the PCLS and subsequent contributions are unconnected. |
Published cases
While it is useful to have official guidance from HMRC, it is always instructive to see how cases are pursued in practice.
In recent years we have seen courts and tax tribunals wrestle with a range of pension issues, including taxable property, lifetime allowance protection, contributions in-specie, inheritance tax and investment due diligence.
To date, however, we are yet to see any cases involving lump sum recycling. Therefore, we have very little to go on in terms of judicial treatment.
From a policy standpoint, it seems likely that the recycling rule was included more as a deterrent than anything, and it is difficult to ascertain how closely HMRC monitors for potential breaches.
Indeed, the guidance says that very few payments are likely to be affected and that PCLSs will not be caught if paid as part of a client’s normal retirement planning.
It is also worth noting that the annual allowance has decreased significantly since the late 2000s, meaning the ability to re-contribute significant lumps sums has also decreased. This might push it further off HMRC’s radar.
Putting this into practice
With this in mind, it is possible you might have clients who are tempted to view such a payment as low risk. They might have unused annual allowance from previous tax years, for example, and could be inclined to use a PCLS to fund a large one-off contribution.
However, the recycling rules are clear, and if the conditions were satisfied in a given case it could be fairly straightforward for HMRC to prove it. Therefore, most advisers will flag the recycling rules with clients and head off these conversations at the earliest opportunity.
