How to avoid recycling tax-free cash

  • Describe some of the challenges surrounding recycling of pensions tax-free cash
  • Explain HMRC's stance on the issue
  • Identify ways of managing the process

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.

A more likely scenario is where there are already general plans for a client to take a lump sum and continue working, and therefore contributing, perhaps to a different pension scheme. In other words, the client is not actively looking to recycle their PCLS, it just happens that as part of their retirement planning they will receive a PCLS and they will also make contributions that are potentially higher than those they have made in the past.

In these situations, the key point is to make sure that any decisions around PCLS and contributions are fully documented as being part of normal retirement planning. Indeed, if the PCLS is being earmarked for a particular purpose, such as paying off a mortgage, it makes sense to record this in the client’s file.

Martin Jones is technical manager at AJ Bell


Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Most pension schemes allow unauthorised payments, true or false?

  2. Which of the following is NOT a factor HMRC considers when identifying recycling of a PCLS?

  3. What is the tax charge on an unauthorised payment?

  4. HMRC will ignore increases in contributions to the pension that are outside the member's control, true or false?

  5. When assessing increases, how does HMRC assess the situation?

  6. According to the author, why has the ability to recycle PCLS waned in recent years?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe some of the challenges surrounding recycling of pensions tax-free cash
  • Explain HMRC's stance on the issue
  • Identify ways of managing the process

I completed this CPD in

To bank your CPD please complete the form below.

Were the stated learning objectives met?

Why weren't they met?

What did you learn from undertaking this CPD exercise?

Why did you undertake this piece of learning?

Any comments about this article or FTAdviser's CPD in general?


Congratulations, you have successfully completed and banked this piece of CPD

Already Banked!

You have already banked for this article.

To bank your CPD you must sign in or


One or more questions have been incorrectly answered,
 please review your answers and try again.

Please complete all the above text fields to bank your CPD.

More Pensions CPDSee my completed CPDSee all CPD